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 Court.  In terms of rest breaks, the Brinker Court held that, “[e]mployees are entitled to 10 minutes’ rest for shifts from three and one-half to six hours in length, 20 minutes for shifts of more than six hours up to 10 hours, 30 minutes for shifts of more than 10 hours up to 14 hours, and so on.”

This rule is set forth in this chart:

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

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

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

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

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

3. Penalty for rest break violations

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

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

4. How to determine employees’ regular rates of pay

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

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

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

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

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

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

 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The California Fair Employment and Housing Act (FEHA) requires employers to provide a reasonable accommodation for an individual with a disability to perform the essential functions of the job unless it would cause an undue hardship on the employer. Common reasonable accommodations include changing job duties for the position, allowing a leave of absence for medical care, modifying work schedules, or providing mechanical or electrical aids.

An employer may discharge an employee with a physical disability or medical condition where the employee, because of that physical disability or medical condition, “is unable to perform his or her essential duties even with reasonable accommodations, or cannot perform those duties in a manner that would not endanger his or her health or safety or the health or safety of others even with reasonable accommodations.” (Gov. Code § 12940, subds. (a)(1), (a)(2).)

The issue in many reasonable accommodation and disability cases involves a dispute over what duties are “essential functions” of a job.   This Friday’s Five sets forth five critical aspects of the analysis used to determine the essential functions of a position:

1. The function may be essential because the reason the position exists is to perform that function.

2. The function may be essential because of the limited number of employees available among whom the performance of that job function can be distributed.

3. The function may be highly specialized, so that the individual in the position is hired for his or her expertise or ability to perform the particular function.

4. Evidence reviewed in making the determination of whether a function is essential includes:

(A) The employer’s judgment as to which functions are essential.

(B) Written job descriptions prepared before advertising or interviewing applicants for the job.

(C) The amount of time spent on the job performing the function.

(D) The consequences of not requiring the incumbent to perform the function.

(E) The terms of a collective bargaining agreement.

(F) The work experiences of past incumbents in the job.

(G) The current work experience of incumbents in similar jobs.

5. Job descriptions are essential.

In making this determination the the job advertisement and the job description for the position at issue will also be reviewed.  Job descriptions should be carefully drafted and updated on a regular basis so that they can be utilized in establishing the essential duties of a job in disability litigation.

I just updated my Facebook settings to prohibit the software company from conducting facial recognition scans on my photos today due to a notification from Facebook that its software would be analyzing my likeness to automatically recognize me in photos posted on Facebook.  This was a coincidence because today I spoke at the American Bar Association’s National Symposium on Technology in Labor and Employment Law on the topic of biometrics in the workplace.  As I’ve written about previously, Facebook has been sued for violating Illinois’ Biometric Information Privacy Act (BIPA) for the analysis it performs on individual’s images that are uploaded to Facebook, and indeed other companies are dealing with legal issues arising from Illinois BIPA.  This Friday’s Five consists of my five ruminations about biometrics use in the workplace.

1.     Technology is developing faster than society’s perceptions of privacy and the law’s ability to keep up. 

 Technology is quickly developing rapidly on biometric gathering and analysis of the information.  As reported today, cameras will likely have the ability to gather data to understand how an individual is feeling and thinking.  We are not at the point of a Star Trek type of body scanner to determine in an individual is sick or injured, but it is not inconceivable that this will be possible in the near future. Current technology allows the collection of a lot of biometric information that most of the public probably does not know is possible, such as thermo-images, identification by your “ear print,” heartbeats and possibly EEGs. It raises the key question: is your ear print, heartbeat, heat signature, or EEG signals private information?

2.     Only 3 states have legislation regarding the collection and analysis of biometric information of individuals. 

A bit surprising to me, all but three states allow for the collection and analysis by employers or consumer companies of biometric information without any type of disclosures or notice to individuals. Illinois, Texas and Washington state have statues that require some type of notice and voluntary consent before biometric information is collected by a private company.  There is no restriction regarding law enforcement collection of biometric data.

On one hand it is not private – it is publicly shared and information that can be acquired through very unobtrusive means.  There does not have to be any contact (except for the EEG monitoring – which requires probes placed on the scalp) with the individual to obtain this information.  Indeed, this information can often be derived through taking a picture, with nothing more complicated than the camera found on most mobile phones.

On the other hand, the technology being developed can gather more intimate information about people beyond their identity.  Thermo-images, EEG scans, and carbon dioxide monitors can gather a lot more information than previously imaginable about an individual’s health and mood.  As this technology continues to develop, it will be able to derive even more detailed information about people’s health, propensities to become sick, likelihood of having cancer, or maybe even be able to detect cancer.

3.     Biometric information is useful in the employment context. 

Employers have already been using biometric information to track employees and for security issues, such as permitting access to certain areas based on fingerprint or retinal scans.  Employees are able to share passwords very easily to get around password safeguards, but it is harder (but not impossible) for them to share fingerprints or “earprints” (yes, you can be identified by your earprint, which are more reliable than fingerprints).

In the future, employers may be interested in tracking blood pressure, heartbeats, and the general anxiety level of employees for workers’ safety, workers comp claims, and productivity.  To the extent the employee asserts some accident or incident occurred on a certain day, it would be useful to have this biometric information for the same time period.  While it would be useful, does it violate an employee’s right to privacy?  While employees do have a reduced privacy rights a work as long as the employer provides notice to the employee that they may be monitored, California courts have also been clear in holding that employees do not forfeit all privacy rights while at work.

4.     If employers collect biometric information, is it simply creating a database that can be used by other third parties?

My libertarian tendencies cause an uneasy feeling in my stomach when realizing the current capabilities with biometric information.  This is partly why I opted out of Facebook’s facial recognition setting mentioned above.  I believe that many people have a concern that while an individual may consent that a company or an employer may collect and analyze their biometric information, it is unknown about what may happen to this information in the future.  This information is an asset that could be acquired by other companies through company purchases or mergers.  This would result in the individual’s biometric information being available to third-parties that the individual never anticipated would have access to the information.  There are currently no legal safeguards restricting who has access to biometric information, except the couple of states mentioned above that have passed legislation on this issue.

5.     Once biometric data is hacked, it may be hard to identify people. 

Again, I recognize that employers and companies have legitimate uses for biometric information.  However, the type of information that is contained in biometric information under current technology and the information that will be able to be gathered by future technology is critical to an individual’s identity.  What if the data is hacked and used by a third-party to steal an individual’s identity?  How will one be able to prove that they are who they claim to be if their finger print data base has been changed by a hacker?  These are issues that will have to be resolved as this technology and area of the law are developing.

I’m conducting a poll of the readers to see if they believe biometric information is private or not.  Please vote and share your comments here.

As I wrote about recently, on March 23, 2018, the Consolidated Appropriations Act, 2018 signed by President Trump changed federal law on the issue of tip pools and allows employers to share tips with back of the house employees.  In connection with the new law, the Department of Labor issued a memorandum this week further explaining the law.  Of importance to California employers, the DOL’s memo sets forth that:

In the meantime, given these developments, employers who pay the full FLSA minimum wage are no longer prohibited from allowing employees who are not customarily and regularly tipped—such as cooks and dishwashers—to participate in tip pools. The Act prohibits managers and supervisors from participating in tip pools, however, as the Act equates such participation with the employer’s keeping the tips.

The full Field Assistance Bulletin NO. 2018-3 can be read here.

My prior article setting forth common issues for California employers in regards to tip pools can be read here.

In addition, I recently posted a video explaining some tip pooling issues facing California employers:

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).

I recently read an article from the Harvard Business Review published in 1981, Managing Human Resources, by William Skinner.  The article raised great points about the lack of respect human resource departments receive in companies at the time.  The article is as timely as when it was published nearly 40 years ago.   Skinner’s article really hit a nerve for me in that companies manage, measure results, and set long terms goals for their functional departments, but these same type of management tools are not often used in human resources.  The article also illustrates that the issues existing nearly 40 years ago, are still persistent today.  Here are the five key lessons for me from the article illustrating why human resources is such a difficult field to manage:

1. Obtaining employee commitment to a company is difficult

Aligning the long term goals of a company with the often short term goals of employees is difficult at best.  Companies are working on 5 or 10 year plans, while employees are focused on the next year’s wages, job titles and potentially moving to another company for a better position.  As Skinner points out, “it’s rosy idealism to think that every employee is going to turn on and perform with 100% devotion to a company and its objectives.  Short-term economic interests are in clear conflict….Further, political factors such as Nader’s Raiders and the anti-big-business wing of the Democratic party exploit employees’ distrust of business, the corporation, and managers, whom employees often see as being out for themselves and siding with their corporate basses against the employee.”

So what is HR’s role to help with employee commitment?  Executives in the company need to understand that HR’s role is a long-term function, and provide HR with the time to develop and execute goals over a 5 year period (or even longer as Skinner recommends).

2. As companies grow, they lose their competitive advantage

Larger the company, the larger the risks are in trying new approaches to HR or employment practices.  Skinner points out that larger companies are inherently more conservative about innovation: “Decisions become more sensitive, have longer shadows, and, understandably, executives may become more cautions and may procrastinate or pass the buck when they can.”  Small start-up companies have been utilizing their size and ability to adapt quickly has a competitive advantage in the technology industry for years now based on the same assumption – big companies are less likely to innovate because they are the established player.  As the incumbent, the management team takes a defensive posture, not an innovative one.

3. Hiring is hard

Skinner sets outs that hiring is difficult: “Subtle differences in job and personal skills and in attitudes toward work and employers have made selecting an outstanding set of employees even more difficult.”  Skinner cites “mass education” as an issue that makes selecting employees even harder.  More of the population has a college degree, but this is not necessarily a good indication of how well the employee will do.  This is especially truer today.

The hiring aspect of HR’s function needs to be more than getting new employees through a new hire orientation and providing them a parking card.  HR needs to be involved in the hiring process to develop a process to ensure the best employees are hired, as opposed to simply filling empty seats.  I strongly believe that having “A” employees will lead to bringing in other “A” employees.  Permitting “B” employees to pervade a company will result in only being able to hire “C” employees.  Hiring is hard, but the selection of employees determines the success of the company.

4. Managing people is hard

The issues facing HR are different than those facing other departments in a company, such as finance or marketing.  HR must manage morale, a HR manager’s decision are based in conflict, and each interaction with employees varies based on personalities.  On top of this, there is also  the ever changing legal landscape and legal obligations the employer faces, which often times the employees do not want to follow (for example getting tipped employees to clock out for an unpaid 30-mintue meal break when they are waiting to collect tips from a large party).   HR managers that can navigate these issues, and do it while maintaining a positive employee morale are a very rare breed, but necessary to a successful company.

5. There is a natural gravity towards alienation

Skinner points out that there are many forces that if left unchecked, are driving employees to become alienated from the company.  Therefore, HR must ensure that managers in the company are trained well on how to communicate with employees, able to listen to employee complaints, and when it is appropriate to involve HR in critical issues.  Managers within the company are the tool to stop alienation, but they must have the tools and know-how to accomplish this.  The process of having employees committed to the company, and trust the company, is a long-term process that can easily be destroyed by a single lawsuit or complaint.  I also view employee alienation with a direct correlation with increase in employment lawsuits.  Employees who are treated with respect, even when are confronted with their inadequacies for what the company needs, may not be happy with the decision, but they will be more likely to respect the decision.

When he opened his first restaurant at 27 years old (Union Square Cafe) and it took another 10 years after that for Danny Meyer to open his second restaurant, Gramercy Tavern.  But then four years later there were two, and the rate he started opening restaurants quickly grew, becoming one of the world’s most successful restaurateurs.  This Fridays Five summarizes five of the key issues about running a successful restaurant/business/career to take away from his interview on the AskGaryVee Show.  Restaurateur?  Perfect, these lessons are on point for you.  Not a restaurateur?  That’s fine too, the business lessons discussed by Danny and Gary are universal truths applicable to all industries.

1. Key lesson: Leave your campsite cleaner than how you found it. 

Danny’s primary lesion was one that he learned when he was 10 years old at camp:  Leave the world a little better than you found it.

2. Four types of competitive personalities.

A successful leader/entrepreneur/person must understand who they are and their personality type.  Key to this understanding is the type of competitor you are.  Danny believes there are four competitive types of personalities:

  • A-competitive – i.e., not competitive at all
  • The person who competes primarily motivated to crush others
  • The person who compete because they hate to lose
  • The person motivated to compete to out-do their personal best

While there is no “right” personality, it is key that individuals understand what drives them, and their motivation.  Another takeaway related to competitive personalities: Leaders have to surround themselves with people who want to be champions.

3. Some of the most successful businesses are born out of accidents.

Danny admits that Shake Shack and Daily Provisions were born out of accidents.  It is important to stay flexible and be able to deviate from a plan to see new opportunities based on the facts/surroundings/people/resources that you are dealt.

4. Create permission to be held to a higher standard.

Invite criticism.  If you won a lot last year, you just need to win more this year.  The minute you start believing in your own success you are destined to fail.

5. Best ways to leverage social media.

People are confused and often link having a strong social media presence to having a successful brand or business.  This is not the case.  If your service and food sucks, social media presence simply speeds up the process of failing.  Social media followers does not equate to being a good restaurant.  After you get people into the funnel, what is important is what happens next.

The traditional PR companies are going to be out of business in 10 years.  Danny use to spend 80% of his marketing budget on public relations five years ago.  Today, 80% is spent on social media and marketing.  Some other key points about social media Danny and Gary discussed:

  • Owners should not be hung up on who is posting to social media.
  • If a company is bullish on social media, then they need to spend money on it.
  • It is all story telling. The form is just changing, it used to be Michelin, Zagat, and then Google.  Now it is social media.  Whatever is the technology of the time is what companies need to use for promotion.
  • The way not to be at the mercy of a third-party is to be a good communicator through the medium that is relevant to the end consumer. Two executions: produce the best product or be the best communicator in the current moment.  The holy grail is to do both.
  • The opportunity for restaurants has never been greater since the communications landscape is changing.
  • Not all of us are natural users of the various social media platforms. Use the social media platforms that you are comfortable with.  However, there is one caveat: companies need to be able to change with the times and don’t be romantic about the first platform you started using if it is clear that your customers are moving to a different platform.
  • Instagram is key for restaurants today.
  • Restaurants are not widget factories. They are about food and love.  Tell a story.

Danny concluded the interview with the question of the day: Restaurants are able to create a social atmosphere, but how can restaurants combine what people want: quick, less expensive, where they want it, with the hug that they are used to giving in their own places?

Yes, this week’s post was a bit off-topic for an employment law blog, but I represent a lot of restaurateurs so I found this interview very fascinating.  Hope you enjoyed this deviation from the law.