On June 1, 2021 the Southern District of Florida granted the motion by Uber Technologies, Inc. (“Uber”) to compel arbitration, finding that the company’s drivers did not engage in sufficient interstate commerce to meet the interstate commerce exclusion in the Federal Arbitration Act (FAA).

Plaintiffs Kathleen Short and Harold White brought a class action against Uber alleging that the company’s policy of classifying its drivers as independent contractors violates the Fair Labor Standards Act and the Florida Minimum Wage Act because the company failed to pay drivers the minimum wage. Uber sought to enforce its arbitration agreement which unambiguously required plaintiffs to pursue any potential claims in an individual arbitration.

The plaintiffs attempted to avoid the agreement by arguing that they were outside the scope of the FAA. Section 1 of the FAA excludes “contracts of Employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce” from the FAA’s requirements. The Supreme Court has previously held in Circuit City Stores, Inc. v. Adams, 532 U.S. 105 (2001), that the “interstate commerce” exclusion applies only to transportations workers.

Judge Aileen M. Cannon noted while the Eleventh Circuit had not weighed in on whether rideshare drivers qualify for the Section 1 exclusion, it has consistently held that the law applies only to workers who “actually engage in the transportation of goods in interstate commerce” and are “employed in the transportation industry.” The court explained that to determine whether the transportation worker exemption applies, courts have analyzed whether the class of workers as a whole engaged in interstate commerce, rather than looking at individual workers.

Judge Cannon rejected the plaintiffs’ exclusion argument based on Uber’s evidence that only 12.8% of the drivers made any interstate trips in 2020, and among those drivers, interstate trips amounted to fewer than 2% of their total number of trips. With similar cases being litigated in California and in the Third Circuit, the applicability of the FAA’s interstate commerce exclusion to rideshare drivers continues to be an important issue for rideshare companies.

Since the Supreme Court issued its seminal 2018 decision in Epic Systems Corp. v. Lewis, acknowledging that the Federal Arbitration Act (“FAA”) permits the use of arbitration agreements with class action waivers, many employers have implemented arbitration programs for their employees. Those arbitration programs have been aimed, in no small part, at avoiding the class and collective actions that have overwhelmed employers, particularly in California.

In response, California passed AB 51, which prohibits imposing “as a condition of employment, continued employment, or the receipt of any employment-related benefit” the requirement that an individual “waive any right, forum or procedure” available under the California Fair Employment and Housing Act (“FEHA”) and Labor Code.

AB 51 was challenged by several business groups, including the U.S. Chamber of Commerce, as being preempted by the FAA. Shortly before AB 51 was to go into effect, Judge Kimberly Mueller of the United States District Court of the Eastern District of California granted a temporary restraining order (“TRO”) and, subsequently, a preliminary injunction barring enforcement of the statute, concluding that the argument that AB 51 is preempted by the FAA was likely to prevail.

The Ninth Circuit, however, has now reversed on the central issue in United States Chamber of Commerce v. Bonta and opened the door for AB 51 to go into effect. It held that AB 51 “was not preempted by the FAA because it was solely concerned with pre-agreement employer behavior.” (The panel upheld Muller’s determination, however, that AB 51’s enforcement mechanisms – civil and criminal penalties – were preempted by the FAA because they punish employers for entering into an agreement to arbitrate.)

The dissent noted that the majority’s ruling created a split with the First and Fourth Circuits. Those courts have held that “too clever-by-half” workarounds to block the formation of arbitration agreements are preempted by the FAA, just as much as laws that explicitly block their enforcement.

That split suggests that the business groups may not only seek an en banc review of the case, but that they are likely to seek review by the United States Supreme Court. Given the Circuit Court split and the important issues Bonta raises under the FAA, there seems to be a significant chance that the Supreme Court would choose to review it.

And, should it do so, the current composition of the United States Supreme Court suggests that Bonta in fact could be reversed.

Of course, only time will tell whether the business groups seek en banc review or seek certiorari with the Supreme Court. And only time will tell whether AB 51 will be stayed during that time.

We will continue to monitor developments.

It is no secret that the Private Attorneys General Act (“PAGA”) has been a cash cow for plaintiffs’ counsel in California.

PAGA allows a single employee (and their counsel) to file suit on behalf of other employees for alleged Labor Code violations, without having to go through the class action mechanism.  In other words, a PAGA plaintiff can file suit seeking penalties for hundreds or thousands of employees, yet never need to show that there are common issues susceptible to common proof – or even that their own claims are typical of those of other employees.

As a result, there has been little to prevent plaintiffs and their counsel from filing massive PAGA actions on behalf of all of an employer’s employees, even without having any basis to believe that many those employees suffered any violation at all.

The in terrorem effect of a lawsuit seeking penalties on behalf of hundreds or thousands of employees has led to a great many multi-million-dollar settlements in which plaintiffs’ counsel typically take one-third of the recovery for themselves, often for doing little more than filing a boilerplate lawsuit and attending a mediation.

For years, employers have argued that PAGA claims should be stricken if the trial of such claims would not be manageable.  That would seem to be the case in many PAGA actions, particularly those with a large number of employees and highly individualized issues, such as whether, when and how employees worked off-the-clock or did not receive compliant meal or rest periods.

In a case involving 1,000 employees, even if 5 employees could take the stand each day to testify about their individualized experiences, trial would last 200 court days. That would seem to be unmanageable on its face.

And if a case involved 10,000 employees . . . well, you can do the math.

Some California trial courts have agreed that a PAGA claim cannot proceed if trial would be unmanageable, analogizing PAGA to claims under other statutes.

But other courts have been reluctant to impose a manageability requirement because no such requirement is expressly included in PAGA itself, and because there was no appellate decision imposing such a requirement in PAGA cases.

Now, employers have an appellate decision they can cite to – Wesson v. Staples the Office Superstore, LLC.

In Wesson, the California Court of Appeal concluded that “courts have inherent authority to ensure that a PAGA claim will be manageable at trial — including the power to strike the claim, if necessary .. . .”

The Court of Appeal noted that the “evidence and argument before the trial court revealed no apparent way to litigate [the defendant-employer]’s affirmative defense in a fair and expeditious manner, as the defense turned in large part on [the allegedly agreement employees]’ actual work experience, yet there was extensive variability” in that group.  Given those individualized issues, there was no dispute that any trial would span several years because there would be hundreds of witnesses.  “The trial court reasonably concluded that such a trial would ‘not meet any definition of manageability,’” and the Court of Appeal affirmed.

Wesson should prove to be a huge development in PAGA actions, informing defense strategies and making it more important than ever to identify and highlight individualized issues that will make trial unmanageable.  And that should impact the negotiation of PAGA settlements where settlement is desirable, helping to drive down the settlement values in these cases.

The in terrorem effect that often drove large settlements may now be gone, matched by the argument that the PAGA claims could be stricken in their entirety.

On September 1, 2021, Massachusetts Attorney General Maura Healey approved two versions of a ballot initiative (version 1, version 2) concerning the relationship between app-based drivers (such as those who transport passengers or deliver food) and the companies with which they contract. If passed, the ballot initiative will enact the Relationship Between Network Companies and App-Based Drivers Act (the “Act”) and classify such drivers as independent contractors, not employees. It will also require ride-sharing and food-delivery companies to provide them with certain benefits.

Like most companies, ride-sharing and food-delivery companies operating in Massachusetts must satisfy M.G.L. c. 149, § 148B’s “ABC test” to show that a worker is an independent contractor. The ABC test provides that workers are independent contractors only if their putative employer demonstrates that they are not subject to the company’s “control and direction,” perform work “outside the usual course” of the company’s business, and are “customarily engaged in an independently established trade, occupation, profession or business.”

Under the Act, however, app-based drivers would be independent contractors if they are not required to work on certain days, at specific times, or a set number of hours; are free to reject requests for rides or deliveries; and are not restricted from working in any other lawful line of work, including working for other app-based transportation and delivery companies (except while actively performing transportation or delivery services using a particular company’s app).

While the Act would classify app-based drivers who meet these criteria as independent contractors, it will also provide them with benefits typically reserved for employees. Specifically, companies would have to provide app-based drivers with at least 120% of the applicable minimum wage, a healthcare stipend, paid sick time, paid family and medical leave, occupational accident insurance, and paid occupational safety training.

Less than a year ago, Californians voted to approve similar measures in their state (although a California state court has recently ruled that the California initiative was unconstitutional).

Before Massachusetts voters will have the same opportunity next November, the Act will have to go through additional steps, such as collecting just over 80,000 signatures, being submitted to the General Court, and if the General Court declines to act on it, collecting roughly 13,000 more signatures.

We will monitor activity on the Act and update this post with pertinent developments.

Many New York families employ domestic workers –individuals who care for a child, serve as a companion for a sick, convalescing or elderly person, or provide housekeeping or any other domestic service. They may be unaware of federal and New York requirements that guarantee those domestic workers minimum wage for all hours worked, paid meal breaks, and overtime compensation.

In addition, New York imposes specific requirements on employers regarding initial pay notices, pay frequency, and pay statements that also apply to persons who employ domestic workers.

To avoid inadvertent wage and hour violations, it is important that persons who employ domestic workers in New York understand the relevant laws regarding domestic workers and approach what many understandably consider a personal relationship as a formal, business one for wage and hour purposes.

Legal Landscape

At the federal level, the Fair Labor Standards Act (“FLSA”) covers persons employed in domestic service in private homes.

At the state law level, two wage and hour laws apply to domestic workers in New York: (i) the Domestic Workers’ Bill of Rights (“DWBR”) and (ii) the New York Labor Law.

Although not widely publicized, the DWBR has been in effect since November 29, 2010 and covers all domestic workers – regardless of their immigration status – except for two categories: (a) those employed on a “casual basis,” “such as those who occasionally babysit or who do other household services for a limited amount of time,” and (b) caregivers related to the employer by blood, marriage or adoption, and those who provide companionship services and are employed by someone outside the family, such as a third-party agency.  See DWBR Facts for Employers and DWBR Fact Sheet.

Minimum Wage

Under both federal and New York law, domestic workers must be paid at least the minimum wage for all non-overtime hours (currently, $15 per hour in New York City, $14 per hour in Long Island and Westchester, and $12.50 in the remainder of the state).

However, under the DWBR, the length of the workweek for overtime calculation purposes varies based on whether the domestic worker “lives in” the employer’s home – a residential domestic worker.  For non-residential domestic workers, the workweek is the same as federal law: 40 hours a week, meaning that the overtime pay requirement is triggered after 40 hours.  For residential domestic workers, however, the workweek is 44 hours a week, meaning that the overtime pay requirements is triggered only after 44 hours.

Notably, under the DWBR, if an employer gives a domestic worker meals and/or lodging, the employer may be granted a specific credit toward the minimum wage paid to the worker, though the amount of nor calculation for such credit is not included in the DWBR fact sheet for employers (“Employer Fact Sheet”) or other related materials.  Instead, the Employer Fact Sheet advises employers to call 1-888-5-LABOR for more information.

Meal and Break Periods

Under the DWBR, domestic workers who work a shift of more than 6 hours on any day are entitled to at least 30 minutes free from duty for a meal period.  The DWBR does not proscribe when this meal break must be provided or taken.  The meal period does not need to be paid.

While not required, if an employer chooses to give an employee short (10 to 15 minute) breaks, consistent with the FLSA, such breaks are considered time worked and cannot be deducted from a domestic worker’s pay.

Days Off /Rest Periods

While the FLSA does not require payment for time not worked, such as vacations, the DWBR requires employers to provide domestic workers with at least three paid days off after one year of work.  For each day of paid rest the employee must be paid at their regular rate of pay for the

average number of hours they work on a normal workday.  Part time workers receive one day of paid rest for working, on average, fewer than 20 hours per week for an employer over the last year, two days of paid rest for working an average of 20 but fewer than 30 hours per week, and three days of paid rest for working 30 or more hours per week.  If an employer provides a domestic worker with three days of paid leave, regardless of the type of leave it is (e.g., sick leave, vacation leave), the employer’s obligation under the law is met.  See DWBR FAQs at p. 3.

In addition, under the DWBR, domestic workers other than those employed by an agency to provide “companionship services,” such as caring for an elderly person, must receive one day (24 hours) of rest per week upon a mutually agreeable day, ideally on the employee’s day of worship.  If the domestic worker agrees to work on his/her rest day, the worker must receive overtime pay.  See DWBR Employee Fact Sheet.

Overtime

In New York, unless domestic workers are employed by an agency to provide “companionship services, they must be paid overtime.  See DWBR Employee Fact Sheet. Specifically, employers must pay in-scope domestic workers overtime at 1 1/2 times the employee’s “basic rate” after 40 hours of work in a calendar week for non-residential domestic workers and after 44 hours of work in a week for residential domestic workers.

In contrast, under federal law, domestic service workers who reside in the employer’s home and are employed by an individual, family or household are exempt from overtime.

Unhelpfully, the DWBR does not provide any guidance on the phrase “lives in [the employer’s] home.”  To the extent that the federal standard is relevant, under the FLSA, to be a live-in domestic worker, the worker must reside on the employer’s premises either “permanently” or for “extended periods of time.”  A worker resides on the employer’s premises permanently “when he or she lives, works, and sleeps on the employer’s premises seven days per week and therefore has no home of his or her own other than the one provided by the employer under the employment agreement.”  “A worker resides on the employer’s premises for an extended period of time when he or she lives, works and sleeps on the employer’s premises for five days a week (120 hours or more). If a domestic worker spends less than 120 hours per week working and sleeping on the employer’s premises, but spends five consecutive days or nights residing on the premises, this also constitutes an extended period of time.”  See U.S. Department of Labor, Wage and Hour Division Fact Sheet #79B (September 2013).

Hours Worked

Under both federal and New York law, employers only need to pay domestic workers for hours worked.   While this concept seems straightforward, its application can be challenging, particularly when a domestic worker is a live-in.  The U.S. Department of Labor advises that “[w]hen a live-in worker engages in typical private pursuits such as eating, sleeping, entertaining, and other periods of complete freedom from all duties, he or she does not have to be paid for that time.”  See U.S. DOL Fact Sheet #79B.  Put slightly differently, “domestic service employees (including live-in employees) who have been completely relieved from duty and are able to use the time for their own purposes—to go to a movie, run a personal errand, attend a parent-teacher conference— need not be paid for this time.”  Id.

Similarly, the New York Minimum Wage Order for Miscellaneous Industries states, “a residential employee – one who lives on the premises of the employer – shall not be deemed to be permitted to work or required to be available for work: (1) during his or her normal sleeping hours solely because he is required to be on call during such hours; or (2) at any other time when he or she is free to leave the place of employment.” 12 NYCRR § 142-2.1(b).  A New York State Department of Labor Opinion Letter from 2010 (after the DWBR was in effect) confirms that “[w]ages need not be paid to your nanny during her normal sleeping hours” and further indicates that payment of wages is not required during periods when the nanny is “free to leave.”  See Opinion Letter RO-10-0075.  The letter also states (rather obviously) that a domestic worker serving as a nanny is not free to leave when a child’s parents are absent from the residence.

With respect to sleep time, under the FLSA, an employer can exclude up to 8 hours a night as sleep time for “permanent” live-in domestic workers “as long as the employee is paid for some other hours during the workweek.”  For non-permanent domestic workers who reside with an employer for “extended periods of time,” an employer can exclude up to 8 hours a night “as long as the employee is paid for at least 8 hours during the 24-hour period.”  In both cases, the predicates for excluding sleep time from hours worked are (i) a reasonable agreement to exclude sleep and (ii) private quarters for the employee.  See DOL Fact Sheet #79D.  The following limitations apply: (i) any interruption to sleep time must be paid and (ii) an employee must get reasonable periods of uninterrupted sleep totaling at least five hours otherwise no sleep time can be excluded.

Pay Frequency:

Under the DWBR, employers must pay domestic workers each week, either in cash or by check.

Notice of Pay Rate:

Under New York State Wage Theft Prevention Act, employers must provide domestic workers with a written notice that lists the regular and overtime rates of pay, how often the employee is paid, the regular payday, the official name of the employer, the employer’s address and phone number, and allowances taken as part of the minimum wage (meal and lodging deductions).

The notice must be given in English and in the employee’s primary language.

The employer can use its own notice as long as it is compliant or one of the New York State Department of Labor’s sample forms.

Wage Statement (Pay Stub):

Per the DWBR, each week, the domestic worker must receive a written statement that shows (i) the number of hours worked; (ii) gross pay (total before deductions); and (iii) any deductions for taxes or other money taken out of the domestic worker’s pay.

Domestic workers must agree in writing to any deductions from their pay.  An employer can only take deductions authorized by law.  Domestic workers cannot be charged for breakage, supplies, and equipment.

What Employers Should Do

Employers should confirm that their domestic worker arrangements are fully compliant with New York state law – that is, that they compensate their domestic workers for all hours worked at the applicable minimum wage on a weekly basis with a compliant wage statement, correctly calculate overtime pay, provide appropriate paid/unpaid meal, rest periods, and days off, and provide a notice of pay rate if not already supplied upon hire.

 

Many people are employed at airports.  Of those, many individuals work within the terminals for private companies.  Federal law requires that those employees who work in the terminals must go through security checks – just like travelers.

Jesus Cazares was one of those employees, working at Los Angeles International Airport (LAX).  In bringing a lawsuit against his employer, Host International, Inc. – which operates the Admiral Club at LAX – Cazares alleged that he and his fellow employees were not paid for the time they spent passing through airport security checks en route to their work at the Admiral Club.  The district court rejected the notion that such time is compensable under California law and, earlier this month, the Ninth Circuit agreed in Cazares v. Host International, Inc.

Relying on the California Supreme Court’s decision in Frlekin v. Apple, Inc., which we discussed here, the Ninth Circuit concluded that, because Cazares was unable to show that he was subject to the control of his employer during the security checks, he was unable to state a claim for unpaid wages under California law.  Specifically, the Court concluded that the allegations made by Cazares “provide[] none of the factual predicates contemplated by the framework set out by the California Supreme Court . . . to support an inference that Host, the employer, had any ‘level of control’ over Cazares during the TSA security check process.  This factor is ‘determinative’ in assessing ‘whether an activity is compensable under the “hours worked” control clause.’”

Cazares also brought a meal period claim, alleging that he “was impermissibly subjected to on-premises meal breaks because, due to the TSA security process, he did not have time to leave the airport and return within thirty minutes.”  The Ninth Circuit rejected that contention, too, finding that Host’s only obligation was to allow Cazares to leave the Admiral Club – not the terminal entirely – and because Cazares made no allegation that he was not permitted to leave the Admiral Club, his meal period claim failed.

Similar to his meal period claim, in support of his rest period claim, Cazares alleged that Host failed to relieve him of all duties and relinquish control over how he spent his time during his rest periods because he “had to spend several minutes walking to the designated rest area.”  Following California law, the Ninth Circuit rejected this notion, too, because Cazares had failed to allege “that (1) he was required to take his rest period at a particular, remote designated area and (2) there were no other areas where he . . .  could take rest periods that were closer than the designated area.”

The Cazares decision is a welcome decision for those employers who employ persons at airports. More broadly, the decision confirms that employers generally need not compensate employees for time spent outside employers’ control.

Employers grappling with the many questions related to bringing employees back into the workplace safely in the midst of the COVID-19 pandemic should pay close attention to the potential wage-and-hour risks attendant to doing so—including whether to pay employees for time spent waiting in line for a temperature check, verifying vaccination status, or completing other health screening inquiries.

Given the growing trend of COVID-19 lawsuits, ignoring these risks could leave employers vulnerable to costly class and collective action litigation.

What the Law Requires

Under the Fair Labor Standards Act (FLSA), employees must be paid for (1) their time performing their “principal” work activity and (2) any time that is an “integral and indispensable part” of their principal work activity. By contrast, employees are not entitled to compensation for time spent performing activities that are “preliminary” or “postliminary” to their principal work duties.

In the leading case Integrity Staffing Solutions v. Busk, the U.S. Supreme Court clarified the meaning of each of these terms.

“Principal activities” are those the employee is employed to perform. An activity is integral and indispensable “if it is an intrinsic element of the [employee’s principal] activities and one with which the employee cannot dispense if he is to perform his principal activities.”

In Integrity Staffing, the Supreme Court held that mandatory post-shift security checks for warehouse employees were not compensable under the FLSA because they did not constitute a principal activity and they were not integral and indispensable to the workers’ primary work of retrieving products from shelves and packaging those products for delivery to customers, even though the employer required the screenings to prevent employee theft.

Notwithstanding Integrity Staffing, state laws may deviate from federal law as to what qualifies as compensable work time. In California, employees generally are entitled to wages for time spent waiting in line for an anti-theft security check after their shift, according to the California Supreme Court in Frlekin v. Apple, Inc.

These seemingly diametrically opposed holdings in Integrity Staffing and Frlekin stem from the way federal and California state law define “work.” Rather than adopt the “principal” or “integral and indispensable” framework, California law defines “hours worked” as all time that employees are subject to the control of an employer. Because the employees in Frlekin could not leave the premises until they went through the security check and were subject to discipline if they failed to comply with the security requirement, the California Supreme Court concluded they plainly were under the employer’s control, and therefore, were entitled to wages for their security check time. Other states similarly may diverge from federal law as to whether such time is compensable.

Integrity Staffing In the Time of COVID-19

Historically and typically, this classic wage-and-hour issue has arisen in contexts such as donning and doffing of protective equipment and waiting in line for security checks. Recently, it has appeared in a new form: COVID-19 health screenings.

The crux of the issue is whether employees are entitled to wages for their time spent waiting in line for a temperature check or completing some other form of health screening:  is measuring an employee’s temperature or verifying vaccination status a “principal activity,” or is it a “preliminary” or “postliminary” activity? On their face, a temperature check, vaccine status verification, and questionnaire about COVID-19 symptoms are not “principal activities,” nor are they intrinsic elements of principal activities in most workplaces, such as warehouses, factories, financial institutions, and retailers. Related issues include (1) whether and to what extent the screening activities are pursuant to government mandates or other guidance and (2) whether the time spent on these activities is de minimis and thus not compensable even if it might otherwise qualify as work.

As of now, it does not appear that any federal or state court has weighed in on whether such COVID-19 related inquiries, and the time spent completing them, are compensable under federal, state, or local law. With the rising tide of COVID-19 related litigation, employers should expect this issue to arise and a court pronouncement on the issue in the near future.

In the meantime, employers should review their health screening policies and procedures. Employers also should review the specific state wage-and-hour laws in jurisdictions where they operate to determine how those laws define compensable work time.

This summer, the Colorado Supreme Court addressed whether employers may implement practices by which employees forfeit accrued, unused vacation pay upon the termination of employment.  In Nieto v. Clark’s Mkt., Inc., 2021 CO 48, 2021 Colo. LEXIS 423 (Colo. June 14, 2021), the Court held that the Colorado Wage Claim Act (“CWCA”) requires employers to pay employees for earned but unused vacation upon the separation of their employment. The requirement applies irrespective of an employment agreement or policy forfeiting an employee’s right to such payment.

In Nieto, the employer’s vacation policy included a provision whereby employees forfeited unused vacation pay upon separation of employment. In response to an employee lawsuit over unused vacation pay, the district court dismissed the complaint, concluding that the terms of the vacation policy governed because the CWCA “clearly and unambiguously gives employers the right to enter into agreements with its employees regarding vacation pay.”

After analyzing the statute’s purpose, its language and structure, the legislative history, and the administrative interpretation by the agency charged with the statute’s enforcement, the Supreme Court concluded that the CWCA protects accrued vacation time just as it protects other wages or compensation. The Court also found that, “[a]lthough the CWCA does not create an automatic right to vacation pay, when an employer chooses to provide such pay, it cannot be forfeited once earned by the employee.” Accordingly, any agreements or terms that forfeit vacation pay are void.

It is important to note that Colorado employers may still restrict the amount and use of vacation days. The Nieto decision does not appear to affect the state’s Wage Protection Rules, which permit employers to cap the accrual of vacation days (e.g., at ten days paid vacation days per year), as long as the employee does not forfeit any time already accrued.

However, it is unclear how Nieto applies to other common time off policies.  For example, neither the Nieto decision nor the Wage Protection Rules offer specific guidance regarding whether employees may lose any frontloaded vacation time not taken by a certain date (e.g., a calendar year), even though the employer simultaneously provides additional vacation days in equal or greater number to replace the forfeited time off. It is also uncertain whether Nieto requires employers to pay employees for some or all accrued but unused leave provided under a single-bucket “paid time off” policy, which combines all forms of paid time off (e.g., vacation, personal, and sick time) into one leave policy.  Because employees may use such leave for any purpose, including those reasons protected by Colorado’s paid sick leave law, presumably some portion of an employee’s accrued but unused paid time off is beyond the reach of Nieto and need not be paid out upon separation of employment.

In light of the Colorado eSupreme Court’s decision, Colorado employers should review their existing vacation policies and employment agreements and reassess any provisions that could require employees to forfeit vacation days.

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*Naomi Friedman, a 2021 Summer Associate (not admitted to the practice of law) in the firm’s New York office, contributed to the preparation of this post.

1. Introduction

If you have hourly employees that earn bonuses, commissions, or other performance payments, this article is for you.

Properly compensating such employees is often not as simple as paying “time and a half” or “double-time” for qualifying hours.  Rather, federal law, and the laws of many states, require employers to “recalculate” overtime rates to include certain types of non-hourly compensation and pay overtime at those higher rates.  Many employers fail to make such payments, and of those that attempt to pay overtime (and double-time) at rates which incorporate these additional earnings, many fail to do it correctly.  Either circumstance results in a failure to pay earned wages to employees, which may give rise to lawsuits seeking back wages, penalties, and other relief available under state and federal law.

By the end of this article, you will be able to identify many scenarios that give rise to a “true-up” obligation, understand the complexity of recalculation, and appreciate the importance to your business of complying with this highly technical requirement of state and federal law.

2. Overtime and Double-Time Obligations

State and federal laws generally require employers to pay hourly employees an increased hourly rate when employees work more than a certain number of hours in a given period of time.  Federal law uses a weekly measure, requiring employers to pay employees one-and-one-half times (1.5x) the “regular rate” after 40 hours of work in a workweek.

Most states have similar rules, as well as laws that require employers to pay an increased hourly rate in other circumstances.  California, for example, requires employers to pay employees 1.5x the “regular rate” (a) after 40 hours of work in a workweek, (b) after 8 hours of work in a workday, or (c) for the first 8 hours on a seventh consecutive day of work in a workweek.  California also requires employers to pay employees double (2x) the “regular rate” (i) after 12 hours in a workday and (ii) for all hours worked after 8 hours on a seventh consecutive workday in a workweek.

3. Understanding The “Regular Rate”

The “regular rate” is a term of art that refers to a blended pay rate that includes many forms of compensation in addition to hourly pay, including commissions, bonuses, piece-rate pay, etc.  The FLSA, for example, defines the “regular rate” as “all remuneration for employment” save specific exclusions (e.g., bona fide gifts, holiday and/or vacation pay, discretionary bonuses). (See 29 U.S.C. 207(e).)  Compensation that is not excluded from the “regular rate” is often referred to as “includable compensation,” which is the term that will be employed for the balance of this article.

The “regular rate” serves a number of public-policy objectives, including: (1) incentivizing employers to employ more workers at straight-time hours instead of fewer workers at overtime hours, and (2) requiring employers who prefer overtime work to compensate employees for the burden of working longer hours.  The “regular rate” concept addresses employers who might try to evade these public policy objectives through the payment of compensation not directly tied to workhours (e.g., commissions, bonuses) by requiring the aggregation of many such forms of compensation into a new (and higher) hourly rate, which must be paid to employees for each overtime (or double-time) hour worked.  From this it follows that when employers do not account for such forms of remuneration when calculating overtime (or double-time) rates, or do so incorrectly, an underpayment of earned wages is the likely result.

The types of pay that qualify as compensation includable in the “regular rate” often differ from state to state, as well as under federal law.  However, overtime laws have historically characterized “includable compensation” as remuneration designed to motivate productivity, retain employees, or that is routinely awarded.  In contrast, reimbursements, vacation pay, and fringe benefits payments (e.g., 401(k) contributions) have been historically excluded from many state and federal definitions of “includable compensation.”

4. Calculating the Regular Rate Presents a Trap for the Unwary

The concept of the “regular rate” is easy to grasp and, in some circumstances, easy to calculate.  Indeed, the DOL Fact Sheet #56A explains the basic calculation in the following way:

Total compensation in the workweek (except for statutory exclusions) ÷ Total hours worked in the workweek = Regular Rate for the workweek

However, many forms of “includable compensation” are not deemed earned, or calculable, within a single workweek.  For example, many commission plans aggregate monthly sales, but those commissions are not deemed “earned” until some later date – after reconciliation for returns, errors, etc.  Many bonuses are similarly not earned in a single workweek, but are attributable to performance over a much longer period of time, such as a quarter or year.  In these situations, the calculation above is not helpful because the “[t]otal compensation in the workweek” component is unknown until a later date.

In such situations, the employer must pay the overtime wages in two installments.  The first installment is for the hourly component of overtime (i.e., true “time-and-a-half”) and is paid on the next regular payday based on the hourly wages earned and paid in that pay period.  The second installment is the “true-up” on the hourly overtime wages, which cannot be paid until the delayed “includable compensation” becomes known and the difference between what was already paid can be calculated.

While the math equation is not complicated, determining the specific items that feed into the calculation can be; because they often call for fact-specific legal analysis of questions like:

  • What forms of remuneration constitute “includable compensation”?
  • When is a specific from of “includable compensation” deemed “earned” and/or “calculable” under the employment agreement and applicable laws?
  • Over what period of time should the “includable compensation” be attributed?

The complexity of calculating the second installment is magnified in some states, such as California, which requires employers to use different calculations for different types of “includable compensation.”

While California is unusual in that regard, the fact that getting the calculation correct requires both math and legal analysis is instructive for employers in all fifty states.  This is because plaintiffs in all fifty states can, and do, file lawsuits against employers seeking allegedly unpaid overtime wages (and the corresponding penalties) on the theory that employers incorrectly calculated the inputs to the “regular rate” equation.

5. Underpaying a Little Can Cost a Lot

Most overtime true-up payments are for relatively small amounts.  There are, of course, circumstances where these payments can be large, as with employees earning significant non-hourly compensation who also work many overtime hours.  Whether the amounts are small or large, failing to make true-up payments constitutes a failure to pay earned wages, which can trigger lawsuits seeking damages, penalties, and fines that well exceed the amount of unpaid wages.

For example, lawsuits under the FLSA can result in the recovery of unpaid wages, legal fees, and in some circumstances, liquidated damages (or interest) and civil penalties.  The penalty schemes in some states are more aggressive.  In California, for example, failing to pay earned overtime could give rise to claims for the unpaid wages, interest, fees, as well as waiting time penalties (i.e., up to 30 days of average daily pay for separated employees), statutory penalties for untimely payment of wages, and civil penalties under the dreaded Private Attorneys General Act.

It also bears noting that the failure to pay overtime triggered by “includable compensation” is often a company-wide issue – i.e., not an isolated instance.  As such, claims based on a true-up theory are often suitable for class treatment and/or are likely to be deemed “manageable” for trial, which means that the exposure on such claims will be significant.  So it is worth the time, attention, and resources necessary to ensure that you comply with true-up obligations, which begins with engaging competent counsel to review your policies and practices that relate to the payment of overtime (or double-time) at the correct regular rate.

In a decision that seems like to be reviewed by the California Supreme Court or rejected by other California Courts of Appeal, one of California’s appellate courts has issued a perplexing decision holding that even employees whose claims are time-barred can file representative actions under California’s Private Attorneys General Act (“PAGA”).

In Gina Johnson v. Maxim Healthcare Services, Inc., the Fourth Appellate District held that the plaintiff could pursue PAGA claims on behalf of other employees even though her own claims were barred by the statute of limitations.

In reaching this decision, the Court relied upon the California Supreme Court’s 2020 decision in Kim v. Reins, which held that an individual who had resolved his own claims could still pursue PAGA claims on behalf of others.

While Kim v. Reins left many legal pundits scratching their heads as it seemed to fly in the face of basic concepts of standing, they could perhaps reconcile the conclusion with the fact that at least the plaintiff in that action had claims within the statutory period. That is not so in Johnson.

In fact, Johnson suggests that even persons who have not worked for an employer for many years could somehow still be permitted to file a PAGA suit on behalf of others.

Could an employee who last worked for an employer 5 years ago file a PAGA action? How about 10 years ago? Or 20?

The holding in Johnson suggests that this appellate panel would conclude that would be permissible. And that is precisely why the decision is likely to be reviewed by the California Supreme Court or ignored by other California appellate courts.