A new decision, Garcia v. Border Transportation Group, LLC, analyzes the California Supreme Court’s decision in Dynamex Operations West, Inc. v. Superior Court, which changed the test for independent contractors under California law.  In Border Transportation, Plaintiff Jesus Cuitalhuac Garcia filed the case against Border Transportation Group, LLC and its owners for wage and hour violations stemming from his classification as an independent contractor.  The trial court agreed with the company’s classification as an independent contractor in granting Border Transportation’s motion for summary judgment.  Plaintiff appealed the ruling granting the motion for summary judgment, and while the appeal was pending, the California Supreme Court issued Dynamex Operations West, Inc. v. Superior Court.

The appellate court, in Garcia v. Border Transportation Group, LLC, held that summary adjudication should not have been granted as to the wage order claims, but was proper as to the non-wage-order claims.  Here are five key take-aways from the Border Transportation decision:

1. Borello factors for distinguishing “employees” from “independent contractors”

Border Transportation filed a motion for summary judgment before the trial court arguing that it did not exercise control over Garcia, who was a taxi driver for the company.  The company also argued that Garcia’s supervisor’s role was limited to collecting payments from plaintiff and other drivers, and never reprimand plaintiff during his employment.

The court set out that the California Supreme Court in Borello “defined a general approach to determine whether a worker is an employee or an independent contractor.”  In Borello, the court explained that the “principal test of an employment relationship is whether the person to whom the service is rendered has the right to control the manner and means of accomplishing the result desired.”  The right to discharge the worker at will, without cause, is strong evidence of an employment relationship.

In addition to the “control” over the workers, Borello also set forth other factors (“secondary indicia”) to review in determining worker’s employment status:

(a) whether the one performing services is engaged in a distinct occupation or business; (b) the kind of occupation, with reference to whether, in the locality, the work is usually done under the direction of the principal or by a specialist without supervision; (c) the skill required in the particular occupation; (d) whether the principal or the worker supplies the instrumentalities, tools, and the place of work for the person doing the work; (e) the length of time for which the services are to be performed; (f) the method of payment, whether by the time or by the job; (g) whether or not the work is a part of the regular business of the principal; and (h) whether or not the parties believe they are creating the relationship of employer-employee.

Borello also makes it clear that the classification used by the parties can be considered, but it is not determinative of how the employee should be classified.

2. “Suffer or permit to work” definition of employment

In Martinez v. Combs, the California Supreme Court reviewed the definitions of “employ” under the IWC Wage Orders and held that there were three alternative definitions of employ.  The broadest definition of employ is to “suffer or permit to work.”  Generally, the court explained that employers who know people are working and not being paid for the work or by not preventing unpaid work from occurring, “clearly suffers or permits that work” and is liable for the wages for these workers.

The court set forth that “the Supreme Court [in Dynamex] explained, the trial court properly applied the ‘suffer or permit to work’ definition of employment in Martinez, instead of the ‘control’ test in Borello, to evaluate class certification for wage order claims.”  However, the Dynamex decision did not address “what standard applies to non-wage-order claims.”

Under the ABC test set forth in Dynamex, a worker is presumed to be an employee, unless the hiring entity establishes each of the following:

(A) that the worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact; and (B) that the worker performs work that is outside the usual course of the hiring entity’s business; and (C) that the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed. (Dynamex, supra, 4 Cal.5th at p. 957.)

3. Wage orders issued by the Industrial Welfare Commission (IWC) set forth requirements for employers that are distinct from the Labor Code.

As the court explained, the IWC developed “constitutionally authorized, quasi-legislative regulations” that “impose obligations relating to the minimum wages, maximum hours, and a limited number of very basic working conditions (such as minimally required meal and rest breaks) of California employees” in various industries.  Employers are required to comply with the requirements set forth in the wage order that applies to their industry (click here for a list of the 17 IWC wage orders).

4.The Dynamex ABC test only applies to wage-order claims, and the Borello test applies to all other claims.

The court in Border Transportation held that “Dynamex applied the ‘suffer or permit to work’ standard contained in the wage order without deciding what standard applied to non-wage-order claims, such as claims for expense reimbursement (such as for fuel or toll road fees) under Labor Code, section 2802.  The court in Border Transportation explained:

[Dynamex] did not reject Borello, which articulated a multifactor test for determining employment status under the Worker’s Compensation Act. Nor did it address the appellate court’s ruling that “insofar as the causes of action in the complaint . . . are not governed by the wage order” and predicated solely on the Labor Code, “the Borello standard is the applicable standard for determining whether a worker is properly considered an employee or an independent contractor.”

The court held that the “suffer or permit to work” and the ABC test was applicable to the wage order claims because the wage orders define “employ” in this language, and the wage orders regulate very basic working conditions and are meant to cover the widest class of workers.

Therefore, the court held that plaintiff’s wage-order claims for unpaid wages, failure to pay minimum wage, failure to provide meal and rest periods, failure to furnish itemized wage statements, and Unfair Competition Law (UCL) are governed by the “suffer or permit to work” standard set forth in Dynamex.  Plaintiff’s remaining claims for overtime (the wage order does not apply to taxicab drivers), wrongful termination and waiting time penalties under Labor Code section 203, are not covered by the wage orders, and therefore are subject to the Borello test.

Therefore, the court found that as to plaintiff’s wage order claims, there is a triable issue of fact as to whether plaintiff was an employee under the ABC test.  The ABC test “presumes a worker hired by an entity is an employee and places the burden on the hirer to establish that the worker is an independent contractor.”

5. Part C of the ABC test under Dynamex requires the company to show an existing independent business operation for independent contractors. 

The court explained that “Dynamex makes clear that the question in part C is not whether [Border Transportation] prohibited or prevented [plaintiff] from engaging in an independently established business.”  Instead, the analysis is if the plaintiff “independently has made the decision to go into business for himself or herself” and “generally takes the usual steps to establish and promote his or her independent business – for example, through incorporation, licensure, advertisements, routine offerings to provide services of the independent business to the public or to a number of potential customers, and the like.”

Defendant relied upon a 2015 Massachusetts Supreme Court case, Sebago v. Boston Cab Dispatch, Inc., to argue that Boston taxi drivers who leased medallions from owners were “customarily engaged in an independently established trade, occupation, profession or business of the same nature as that involved in the service performed.” In rejecting this analogy to the facts in this case, the court held that “Dynamex makes clear that California follows the version of part C that requires an existing, not potential, showing of independent business operation.”  The court held that based on the facts in this case, plaintiff was dependent on the company for his taxi permit, and therefore did not have the ability to independently operate on his own accord.  Indeed, the court noted that defendant “did not establish that [plaintiff] ‘is customarily engaged in an independently established trade, occupation, or business.”

Regular readers of the blog probably know about my YouTube channel for the Employment Law Report.  This Friday’s Five focuses on recent popular videos I’ve published covering employment law updates, best practices, and an interview with a restaurant consultant.  Hope you enjoy the videos, and please subscribe to the channel to make sure you don’t miss any future updates.

1. 5 Huge Misconceptions About California Employment Law

2. California’s Paid Sick Leave – Quick Update

3.California’s New ABC Test For Independent Contractors

4. My Five Free Resources for California Employers

5. My interview with Salar Sheik from Savory Hospitality

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!

This Friday’s Five is a reminder of the free resources I’ve published that you’re probably not utilizing:

1) Subscribe to my Youtube channel here: http://bit.ly/2MxDueG

2) Subscribe to my blog, the California Employment Law Report here: http://bit.ly/2lHK1Io

3) Download White Papers:

4) Subscribe to receive notices of upcoming seminars/webinars: http://bit.ly/2N8tY2E

5) Subscribe to receive notices of new episodes of my podcast: http://eepurl.com/dzxRib

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.

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

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

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

1. Tip pooling explained

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

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

2. Tip pooling is permitted under California law

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

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

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

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

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

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

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

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

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

5. Tip pools may include back of the house employees

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

1. Rest break obligations

As a review, in 2012 the California Supreme Court issued its monumental decision regarding meal and rest breaks under the California Labor Code in Brinker Restaurant Group v. Superior CourtIn terms of rest breaks, the Brinker Court held that, “[e]mployees are entitled to 10 minutes’ rest for shifts from three and one-half to six hours in length, 20 minutes for shifts of more than six hours up to 10 hours, 30 minutes for shifts of more than 10 hours up to 14 hours, and so on.”

This rule is set forth in this chart:

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

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

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

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

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

3. Penalty for rest break violations

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

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

4. How to determine employees’ regular rates of pay

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

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

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

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

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

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