Here are five questions that a company, either through its managers or human resources department should be asking its employees on a routine basis:

1. Are you aware of the company’s open-door policy?

If the employee is not aware of the policy, explain it to them, and document the conversation.  If done right, this can go a long way in making employees more comfortable in voicing concerns or making complaints.  As I always explain to clients, it is better knowing the bad facts and issues sooner than later.

2. Can you explain the company’s meal and rest break policy?

See if the employees can explain the policy.  If they can, great – document the conversation.  If they cannot, explain the policy to them and go over any questions they have and document that this was done.  Then follow up with the employee to ensure that they have been able to take all of their meal and rest breaks.

3. You have not had any complaints in the past, do you have any now?

Proactively asking employees if they have any complaints can help address issues before they become problematic.  This is taking an active approach to the open-door policy.  I like to call it the active-door policy – you are actively engaging employees to talking with the company and given them an opportunity to voice any concerns.  These conversations should be documented.

4. Are there any employees you simply do not like working with?

Some employers might feel that this is too direct, but I think the question may draw out potential areas of conflict between employees.  While workplace conflict is not illegal in and of itself, the quicker employers can address and resolve conflict greatly reduces the likelihood of litigation.  If the company can address these concerns, and potentially deal with or move employees so that they do not have to work with others they do not like, it could be a solution to a more productive workforce.

5. Would you recommend that your friends should work here?

If yes, then ask for the recommendations.  The answer is no, ask follow-up questions about why.  Again, the quicker the employer can address potential problems, the better.

As noted above, these discussions should be documented.  The documentation will be good evidence that the company has an open-door policy and is effectively dealing with employee’s complaints on a timely basis.  This could be essential in defending many types of claims that could arise through litigation.

How is it Friday already, and summer is coming to a close quickly?  Time for another Friday’s Five, and this week I cover five reminders about meal break waivers in California:

1. Meal break timing obligations.

An employer may not employ an employee for a work period of more than five hours per day without providing the employee with a meal period of not less than thirty minutes.  A second meal period of not less than thirty minutes is required if an employee works more than ten hours per day. Labor Code Section 512.

The California Supreme Court held in Brinker Restaurant Corp. v. Superior Court, that:

We conclude that, absent waiver, section 512 requires a first meal period 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.

See my previous post on when employers must authorize employees to take meal breaks.

2. Employer’s duty to authorize meal breaks.

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 the employer would not owe the employee the additional hour of pay in the form of premium pay for a violation. The Supreme Court explained in Brinker:

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.

While employees may voluntarily work through meal breaks, if the employer knows or should have known that the employee working during this time, the employer must ensure that the employee is paid for the time working.

3. Employees may waive meal breaks for shifts less than 6 hours or shifts less than 12 hours.

If the total work period per day for an employee is no more than six hours, the meal period may be waived by mutual consent of both the employer and employee.  Likewise, if the if the total hours worked is no more than 12 hours, the second meal period may be waived by mutual consent of the employer and employee only if the first meal period was not waived.  Labor Code Section 512.

 4. Meal break waivers for shifts less than six hours and less than 12 hours are not required to be in writing, but should be.

Labor Code section 512 does not require an employee’s waiver of their meal breaks for shifts less than six hours or shifts less than 12 hours to be in writing.  However, in order to avoid any potential disputes and to be able to defend against any potential claims by disgruntled employees, it is always a good practice to have the voluntary waivers documented and signed by employees.

5. Don’t confuse “on-duty” meal agreements with meal period waivers.

On-duty meal period agreements are different than meal period waivers.  The Wage Orders provide for an “on duty” meal period that is an exception to the required meal break if the following requirements are met:

An “on duty” meal period shall be permitted only when the nature of the work prevents an employee from being relieved of all duty and when by written agreement between the parties an on-the-job paid meal period is agreed to. The written agreement shall state that the employee may, in writing, revoke the agreement at any time.

Wage Order No. 4-2001(a)(emphasis added). Unfortunately, the definition of the “nature of the work” is not clear, and has been construed very narrowly against employers.  For example, the Department of Labor Standards Enforcement (“DLSE”) has issued an opinion letter addressing whether a shift manager in a fast food restaurant working the night shift would be allowed to take a “on duty” meal period.  The DLSE concluded that based on the facts presented in the situation of the fast food restaurant, the nature of the work in the restaurant should not prevent the shift manager from being relieved of all duties for 30 minutes, and therefore the on-duty meal period would not be valid in this context. Click here to download the opinion letter.

Click here for more information about on-duty meal period agreements. Implementing an on-duty meal period agreement in California needs to be approached with caution, and should only be done with assistance from knowledgeable counsel.

I’m moderating a panel discussion on best practices for how to hire and retain good employees at the Western Food Service and Hospitality Expo (WFHE).  The panelists are Joseph Pitruzelli owner of Wurstküche, Francis Drelling General Counsel at Specialty Restaurants Corporation, Naz Moin former director of Human Resources at PizzaRev, and Madelyn Alfano owner of Maria’s Italian Kitchen.  It is on Monday, August 20 at 4 p.m. in the Education Theater (session number S127.  Hope you join us if you are attending the Expo.

In addition, in connection with the California Restaurant Association (CRA), my firm is offering a special an in-person training session that will comply with all the requirements outlined in the regulations regarding California’s Mandatory Sexual Harassment Prevention Training for supervisors (AB 1825) . Supervisors for large employers are required to take this training every two years.  As a bonus, Sexual Harassment Prevention registrants will gain complimentary access to the WFHE show floor, valid day of training (Tuesday, 8/21/18).  The training is at the LA Convention Center, and will take place from 9 to 11:30 a.m. (the show starts at 11 a.m.).  This training is offered to CRA members for FREE and $25 for non-members. Both members and non-members will need to register online here before the day of the training.  Click here for more details about the training and to register.

My firm will have a booth at the show again this year, so if you attend the show, be sure to stop by and say hello.  We are at Booth #1543 (across the aisle from the California Restaurant Association’s booth).  The Expo runs from August 19 to 21 and is at the LA Convention Center.

Also, please stop by our booth and say hi to us if you are attending.  We have some nice swag for readers of the blog!

With the summer coming to an end quickly, and people trying to fit in their vacations during these final weeks, it is a good time to review a few aspects of vacation time under California law. There are numerous rules about how employees earn vacation, and it is often tricky to draft a proper policy without some advice from an experienced California employment attorney. Many out-of-state employers assume that their policy complies with California law when setting up operations, but California is unlike most other states when it comes to vacation time. This Friday’s Five reviews five issues on vacation policies that can create problems for employers operating in California:

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, any type of policy requiring employees to lose vacation that has already been 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 on the employee’s last day of work.
An employee who is discharged must be paid all of his or her wages, including accrued vacation, immediately at the time of termination. See Labor Code Sections 201 and 227.3

4. Deductions are not permitted from employee’s final wages for use of vacation that was not accrued.
Vacation is treated as a form of wages under California law, and by permitting an employee to take vacation time before it is earned, is effectively providing a loan to the employee.  Employers may not utilize self-help remedies to recover debts from the employee’s final pay check, including deducting wages owed to an employee to cover vacation that time was used but had not yet accrued.

5. “Cliff vesting” policies are problematic.
Employers may set probationary periods or waiting periods during which employees do not accrued vacation time. However, the DLSE maintains that employers may not maintain a policy granting employees a lump sum of vacation upon reaching certain dates. The DLSE’s view on this type of “cliff vesting” is that the employer is really attempting to provide for accrued vacation, but at the same time is improperly 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 in which the vacation is granted to the employee. It is safer for employers to avoid these 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.

As you can probably tell by now, California law is vastly different than Federal law and other states. It can be a trap for employers, but with some understanding of the obligations created under the law it can easily be managed.

Hope you are enjoying the final weeks of the summer.

California employers need to routinely need to review their policies and practices to make sure they are complying with intricacies that may arise in their work place.  In law school, attorneys-to-be are taught to “issue spot,” and the unfortunate litigation landscape that faces California employers, business owners and their supervisors must also “issue spot” and make sure the unique aspects of California employment law are being complied with to avoid liability.  This Friday’s Five covers five issues employers should issue spot on a routine basis to help ensure compliance and reduce liability:

1. Reporting time pay

Reporting time pay is triggered when an employee is required to report for work, but is not put to work or is furnished less than half their usual or scheduled day’s work.  If this occurs, the employee needs to 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.

It is important for employers to train managers and supervisors about this requirement, so that they understand the need to pay reporting time pay, or report the instance to HR to ensure the employee receives reporting time pay if they are sent home before one-half of their shift is worked.

2. Split shift pay

A split shift is a work schedule that is interrupted by a non-paid, non-working period established by the employer that is other than a meal or rest break.  So if the employee is required to work a shift, but then asked to report to a second shift over later in the same day, the employer may be obligated to pay a split shift premium.  Again, this issue is one that front-line managers and supervisors need to be trained on to ensure that split shifts are being reported to HR or other appropriate management in the company to ensure any split shift pay obligations are being paid.

3. Expense reimbursement issues

Under Labor Code section 2802, employers need to reimburse employees for any business expenses they incur in the course of completing their work for the employer.  This basic concept sounds easy in principle, but given the technology used in today’s workplaces, there can be many areas that expose employers to liability.  For example, if employees are required to work at home, have access to the internet, print reports, or send and receive faxes, the costs for completing this work should be reimbursed by the employer.  Other areas that are often litigated are cell phone reimbursement, mileage reimbursement, and reimbursement for the costs of uniforms and safety equipment.

4. Off-the-clock claims

Employers can be held liable for unpaid wages if they knew or should have known that employees were working and not being paid for the work.  Employers should establish and regularly communicate a time keeping policy to employees and supervisors.  The policy should set forth that employees always have an open door to complain to their supervisors and other managers or human resources about missed meal and rest breaks, unpaid wages, or unpaid wages.  If employees routinely acknowledge that they understand the time keeping policy and are agreeing to record their time through the employer’s system, this can go a long way in defending any off-the-clock claims.

5. On-Call time

Even though employees are traveling to a work site or even sleeping, if the employee is under the control of the employer, the employer may have to pay them for being on-call.  For example, the California Supreme Court held that security guards who were required to reside in a trailer provided by the employer at construction worksites would still need to be paid for the time they slept while on-call.  In that case, during weekdays the guards were on patrol for eight hours, on call for eight hours, and off duty for eight hours.  On weekends, the guards were on patrol for 16 hours and on call for eight hours.  The Court held that the employer was not permitted to exclude the time guards spent sleeping from the compensable hours worked in 24-hour shifts.  See Mendiola v. CPS Security Solutions, Inc.

Likewise, in Morillion v. Royal Packing Co., the California Supreme Court held that, “we conclude the time agricultural employees are required to spend traveling on their employer’s buses is compensable under Wage Order No. 14-80 because they are ‘subject to the control of an employer’ and do not also have to be ‘suffered or permitted to work’ during this travel period.”  Generally, travel time is considered compensable work hours where the employer requires its employees to meet at a designated place and use the employer’s designated transportation to and from the work site.

This week’s Friday’s Five covers five huge misconceptions about California employment law that can land employers into huge legal trouble:

1. Meal and rest breaks seem so trivial.

The topic may seem trivial for companies that have not faced this litigation before, or for out of state employers who wrongly believe California cannot be much different than federal requirements.  However, with the penalty owed to employees of one hour of pay for each missed meal or rest break (i.e., up to two hours of penalty pay per day) these violations add up to significant amounts of liability very quickly.  A verdict against Wal-Mart for $172 million is a good example of the liability that even small employers face in this regard.

2. My payroll company understands the laws about wages and itemized pay statements.

Payroll companies are not law firms and they will not notify you if you are not paying your employees properly, calculating overtime correctly, tracking and reporting paid sick leave appropriately, or even ensure that the paystubs they generate for your employees comply with the law.  It is the employer’s responsibility to ensure the employment laws are being complied with, and it is wise to have an experienced employment lawyer review these practices and audit the practices of the payroll company.

3. The employee’s title determines if they are owed overtime.

An employee’s title is not determinative of whether they qualify as an exempt employee and do not need to receive overtime pay.  See my previous article on the various exemptions that employees may qualify for, and the requirements necessary for employees to meet those exemptions.

4. Employees can be provided “comp time” instead of paid overtime.

While it is true employers may provide employee’s comp time in lieu of overtime, there are many technical restrictions that must be met in order for comp time plans to be legal under California law.  Labor Code section 204.3 only authorizes employers to provide nonexempt employees with compensated time off instead of paying for overtime if the following requirements are met:

  • Payment for comp time must be at the overtime rate of pay (i.e., not less than one and one-half hours for each hour of employment, or double time if applicable)
  • Must be in writing before work begins
  • Employees cannot accrue more than 240 hours of compensation time off
  • Employee has to make a written request for comp time in lieu of overtime
  • Employee must be scheduled to work at least 40 hours a week
  • Employee must be paid at rate of pay in effect at time of payment
  • Payment at termination must be at high of current or three-year average rate of pay
  • Employee must be permitted to use comp time within reasonable period
  • Employer must keep records of comp time accrued and used

5. My company does not need employment counsel to review our polices on a regular basis, we have it under control.

If you have been a reader of this blog for any time period, you understand that every employer in California needs to understand their legal duties when it comes to employing workers.  And with competent employment law counsel [:)] it is not hard to comply with the law, but it is difficult to keep current with the law and ensure all legal obligations are being met.  California employment law is regularly changing.  In addition, employers need to make sure they are complying with intricacies that may arise in their work place, such as:

 

Also, in case you missed it, my Podcast is live:

Youtube: https://www.youtube.com/watch?v=WUbLzjwuUao&t=2s

iTunes: https://itunes.apple.com/us/podcast/zaller-talk/id1405859405?mt=2

Spotify: https://open.spotify.com/show/6zpZovQKMeZ5l2DYL0nh3q?si=KggpsQ6pSIGf1-PCMdM8dw

Have a great weekend.

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.

Clients come to my firm often frustrated by California employment laws and their complexity, the raising costs of doing business in California (such as the higher minimum wage), and the legal system in general.  I have to agree that California poses one of the most difficult business environments businesses have to operate within, but I come back to thinking that many of the issues the clients voice frustration with can be managed if they are given the tools to do so.  This Friday’s Five lists five things every employment attorney should tell their California clients:

1. Litigation is expensive (and no, I’m not just talking about legal fees).

Two lessons here:  1) Don’t approach litigation with the attitude that you are fighting for principle (unless you have unlimited resources), and 2) focusing on human resources/policy development/legal compliance before litigation (see #5 below) can help prevent litigation and save resources.  For most businesses, litigation should be avoided, but to the extent it cannot be avoided, companies should usually view the transaction not as a personal vendetta, but as a business transaction.  Executives should weigh the costs of litigation versus the benefits just as they do in any other business decisions to determine whether to litigate the case or make an attempt at settlement.  But don’t approach this decision based on any attorney’s advice that litigation can be completed fast and inexpensively.  As there are defense costs, but as just or possibly costlier is the time and effort that the company and its managers and employees will have to spend defending the litigation instead of running the business.  This is often a hidden cost that must be taken into consideration.

2. Treating people with respect will likely result in less litigation.

I understand, it seems like California employment law is always adding new requirements on employers that are difficult to comply with.  However, with a small amount of time and attention, most of the issues that present the largest amounts of potential liability for employers can easily be managed.  But for the few occasions when it is legally unclear about what action the company should take, or if legal counsel cannot be reached in time for a decision where the law is not clear, employers that treat the employee with respect will usually avoid litigation.  I believe that, for the most part, employees understand that employers/managers/supervisors must make difficult decisions.  When the employee is treated with respect during a difficult employment decision, even though they might not like the decision, they will probably understand why it was made, and most likely will not hold a grudge against the company.

3. When in doubt, document.

As a litigator, the worse feeling I have is when the employer provides me with an employee personnel file for a problem employee, but the personnel file contains less than a few pages.  Employers’ primary defenses to many employment lawsuits will be won or lost on the documentation created and maintained by the employer.  The employee that believes they were wrongfully terminated will face a much tougher case if there were a dozen documented performance write-ups in their file setting for the date and examples of what the employee did or failed to do.  For additional information, see my prior post, Five best document storage and retention practices for California employers.

4. Train front line managers and supervisors.

A company’s managers and supervisors are the eyes and ears of the company.  They must be well trained about what issues can create legal liability for the company, as well as be trained in new developments in the law (for example, so they are not asking about criminal histories during the interview process since the beginning of 2018) and are trained about how to be managers (and treat people with respect).  This training for managers/supervisors is the difference between a good and a great company.

5. A small investment in human resources will provide a return.

As I wrote about last week, human resource departments need to have a more critical role in organizations and should be viewed on the same level as marketing and finance departments.  Giving HR managers budgets to proactively update policies, handbooks, and training sessions for managers will provide a positive return to the company.  Now it may not be an immediate net gain on the financials, but if one lawsuit is avoided because of the proactive measures put into place, this will be money well spent (see item #1).

In a huge development in the last couple of weeks, a change in federal law now permits California employers to include back of the house employees in tip pools.  This week’s post is an update and a general discussion about issues facing restaurants, hotels, and other industries where tipping and gratuities are left for employees.  This simple concept is surprisingly complex for employers.  Here are five issues employers should understand about tips in California.

1) Who owns a tip?

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

2) Is employer mandated tip pooling legal?

Yes. In the seminal 1990 case on tip-pooling, Leighton v. Old Heidelberg, Ltd., the court held that an employer’s practice of tip pooling among employees was not prohibited by section 351 because the employer did not “collect, take, or receive” any part of a gratuity left by a patron, and did not credit tips or deduct tip income from employee wages. The court relied upon the “industry practice” that 15% of the gratuity is tipped out to the busboy and 5% to the bartender, which was “a house rule and is with nearly all Restaurants.” However, owners, managers, or supervisors of the business cannot share in the tip pool.  Employers need to be careful to exclude any employees who direct the work of other employees from tip pools, as lead shift supervisors, floor managers, and others who do not have the authority to hire or fire may still be considered a supervisor for tip pooling purposes.

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

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

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

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

3) When do tip tips left on credit cards have to be paid, and can a deduction made for processing the credit card transaction?

If a patron leaves a tip on their credit card, the employer may not deduct any credit card processing fees from the tip left for the employee. Moreover, tips left using a credit card must be paid to employees no later than the next regular payday following the date the credit card payment was authorized. See Labor Code § 351.

4) Can California employers have back of the house employees share in a tip pool?

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.  Therefore, as of March 24, 2018, California employers may include back of the house employees in any tip pooling arrangements.  Prior to President Trump’s approval on the new law, this was not the case, as a Court in Oregon Restaurant and Lodging Association v. Perez, the Ninth Circuit Court of Appeals, which covers California, held in February 2016 that the Department of Labor’s regulations about who can participate in tip pools applies to states like California which do not permit tip credits.  The DOL had issued regulations that under the FLSA a tip pool is only valid if it includes employees who “customarily and regularly” receive tips, such as waiters, waitresses, bellhops, counter personnel who service customers, bussers and service bartenders.  According to the DOL past rule, a valid tip pool “may not include employees who do not customarily and regularly receive[] tips, such as dishwashers, cooks, chefs, and janitors.”  The Plaintiffs in Oregon Restaurant filed a petition for review to the United State Supreme Court.  Given the new law that took effect, the Supreme Court’s review of the case is not necessary.

While some states provide the employer with a “tip credit”, California law does not allow this. However, with the recent passage of the increase in California’s minimum wage, there is more discussion of examining whether a tip credit should be considered in California. However, current law does not allow employers to “credit” an employee’s tips towards the minimum wage requirement for each hour worked.

A service charge added to a customer’s bill is not a tip or gratuity and remains the property of the employer.  Therefore, the employer may distribute the service charge to its employees, including back of the house employees as it wishes.  However, if a service charge is distributed to employees, it is considered wages and effects the employee’s regular rate of pay for overtime purposes as discussed below.

5) Do tips change an employee’s regular rate of pay for overtime calculations?

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

However, if an employer implements mandatory service charges and shares these service charges with employees, the service charges must be considered wages for overtime and tax purposes.  Therefore, the employee’s regular rate of pay for overtime purposes will be higher when mandatory service charges are distributed to the employees.  To calculate an employee’s regular rate of pay, the employer must divide all compensation for the week by the total number of hours worked by the employee.

**Additional issue: Pay attention to other requirements under local ordinances regulating service charges.

For example, Santa Monica’s minimum wage ordinance requires employers to “distribute all Service Charges in their entirety to the Employee(s) who performed services for the customers from whom the Service Charges are collected.”  Santa Monica Municipal Code § 4.62.040.  “Service Charge” is defined as “any separately-designated amount charged and collected by an Employer from customers, that is for service by Employees, or is described in such a way that customers might reasonably believe that the amount is for those services or is otherwise to be paid or payable directly to Employees…under the term ‘service charge,’ ‘table charge,’ porterage charge,’ ‘automatic gratuity charge,’ ‘healthcare surcharge,’ ‘benefits surcharge,’ or similar language.”  Santa Monica Municipal Code § 4.62.010(g).