Upsetting what many considered settled precedent, a California Court of Appeal has held that a mandatory service charge may qualify as a “gratuity” under California Labor Code Section 351 that must be distributed to the non-managerial employee(s) who provided the service.

In O’Grady v. Merchant Exchange Productions, Inc., No. A148513, plaintiff, a banquet server and bartender, filed a putative class action against their employer for its failure to distribute the entirety of the proceeds of an automatic 21% fee added to every food and beverage banquet bill to the non-managerial banquet service employees who staffed the event, alleging a violation of California Labor Code Section 351, as well as intentional interference with advantageous relations, breach of implied contract, and unjust enrichment.

Section 351 prohibits an employer or agent from taking a gratuity left for an employee by a patron, including but not limited to a tip paid by credit card, or otherwise crediting or deducting such gratuity against/from the employee’s wages.  According to plaintiffs, customers would have reasonably believed that these charges were remitted in full to service staff based on the depiction of these charges as a mandatory, preset “service charge,” as well as industry custom. The trial court found for defendant, relying on two California court of appeals decisions – Searle v. Wyndham International, Inc. and Garcia v. Four Points Sheraton LAX – each holding that a mandatory service charge is not a gratuity for purposes of California Labor Code Section 351.

Reviewing the trial court’s decision de novo, the Court of Appeal analyzed the statutory definition of “gratuity,” which is “any tip, gratuity, money, or part therefor that has been paid or given to or left for an employee by a patron of a business over and above the amount due the business for services rendered or for goods, food, drink, or articles sold or served to the patron.” The court also looked to the legislative intent behind the statute (i.e., protecting employees from employers who used their positions to unfairly command a share of the employee’s tips).

Upon its review of the statute, legislative history and precedent, the court found that the definition of “gratuity” is amorphous and vague enough to encompass a mandatory service charge, which is added to the cost of food and drink, thereby rendering it “over and above the actual amount due….”  The court further reasoned that defendant’s practice, if accurately depicted, would be inconsistent with the purpose of Section 351, namely, ensuring that employees, not employers, receive the full benefit of gratuities that patrons intend for the sole benefit of those employees who serve them.

While the court acknowledged that Searle and Garcia held that mandatory service charges were not gratuities, it distinguished these decisions on the factual basis that in both cases the allegedly deceptive service charges were paid to employees, not retained by the employers.  Furthermore, the court emphasized that “the notion of an involuntary gratuity has perhaps become more widespread and accepted than in the past,” thereby rendering the distinction between an involuntary and voluntary gratuity less meaningful.  Without a more developed factual record before it (the case was dismissed early in the proceedings), the court was constrained to hold that a mandatory service charge may constitute a gratuity as a matter of law, and remanded the case for further proceedings.

Advice for California Employers

Given the apparent split of authority created by O’Grady, the California Supreme Court may well resolve the issue of whether, and under what circumstances, a mandatory service charge can or will be considered a gratuity.  In the meantime, to mitigate risk, California employers in the hospitality industry should review any mandatory charges they impose on their patrons and determine whether such charges are distributed to service personnel.

With that said, O’Grady does not necessarily foreclose employers from retaining mandatory service charges and/or distributing them to managerial personnel.  In O’Grady, there was no suggestion in the record that defendant’s customers were advised in any way that the mandatory service charge was not intended to be a gratuity and would not be paid to employees providing the service.  In New York, employers who include prescribed language in their customer contracts disclosing that a mandatory charge is not purported to be a gratuity and will not be distributed to the employees who provided service to the guest are deemed to have met their burden of proving that a charge is not a tip.  In such circumstances, the law presumes that a reasonable customer would not consider the service charge to be a tip.  While there is no statutory analogue in California, the O’Grady decision suggests that the customer’s reasonable expectations regarding the nature of a service charge are relevant to the gratuity analysis.  Accordingly, short of distributing all service charges to appropriate service employees, California employers seeking to retain service charges should include a disclosure similar to that required in New York.

We will continue to monitor O’Grady, as well as any guidance issued by the California Labor Commissioner, and will report on any significant developments.

As we wrote here recently, California’s Governor Gavin Newsom signed a bill known as AB5, which is designed to make it more difficult for companies to treat workers as independent contractors.  The new law, which goes into effect on January 1, 2020, codified and expands the “ABC” test adopted by the California Supreme Court in Dynamex Operations West, Inc. v. Superior Court for determining whether workers in California should be classified as employees or as independent contractors.

Now some gig economy businesses are striking back.  On October 29, 2019, a coalition of businesses and drivers announced a ballot initiative that could present a potential solution to AB5.  The coalition seeks to have the proposal – known as the “Protect App-Based Drivers & Services Act” – appear on the California ballot in November 2020.

Under the initiative, which reportedly has been backed by Uber, Lyft, and DoorDash, certain “app-based” transportation and delivery drivers would necessarily qualify as independent contractors under California law, so long as the following conditions are met:

  • The network company does not unilaterally prescribe specific dates, times of day, or a minimum number of hours during which the app-based driver must be logged into the network company’s online-enabled application or platform;
  • The network company does not require the app-based driver to accept any specific rideshare service or delivery service request as a condition of maintaining access to the network company’s online-enabled application or platform;
  • The network company does not restrict the app-based driver from performing rideshare services or delivery services through other network companies except during engaged time; and
  • The network company does not restrict the app-based driver from working in any other lawful occupation or business.

In addition, the initiative would extend various protections to covered drivers.  For example, drivers would be guaranteed 120% of the minimum wage; 30 cents per mile for fuel, and vehicle wear and tear; healthcare stipends (for drivers who work more than 15 hours per week); occupational accident insurance; automobile accident and liability insurance; and protection against unlawful discrimination and sexual harassment.

The initiative also calls for new customer and public safety protections, including mandatory recurring background checks, required safety training, caps on driver hours, and the mandatory implementation of zero tolerance policies for drug and alcohol offenses.

If the coalition garners enough support for the initiative, the measure would appear on the California ballot as early as November 2020, at which point voters would have a chance to weigh-in on an issue that has thus far been controlled by the courts and the legislature.

On August 26, 2019, we wrote of the plan by the U.S. Department of Labor’s Wage and Hour Division (“WHD”) to update the Fair Labor Standard Act (“FLSA”) regulations on calculating overtime pay for salaried non-exempt workers to allow employers to include additional forms of compensation in the so-called “fluctuating workweek” calculations.  Under a fluctuating workweek calculation, an employer divides all of an employee’s relevant compensation for a given workweek by the total number of hours the employee worked in the week to derive the regular rate for that week, and then pays one half of that regular rate—in addition to the other pay the employee is receiving for the week—for each hour of overtime.  This method of calculating overtime is available under federal law and in most, but not all, states.  On November 4, 2019, the WHD released the text of the proposed rule for public comment.

The WHD proposes to revise the applicable regulations at 29 C.F.R. part 778 to state expressly that any additional forms of compensation—whether bonuses, premium payments, or otherwise, and whether time- or performance-based—are compatible with the fluctuating workweek method of compensation, and that such payments must factor into the calculation of the regular rate unless they fall within a regular rate exclusion under FLSA sections 7(e)(1)-(8) (e.g., gifts, special occasion bonuses, discretionary bonuses, premium pay for hours in excess of a daily/weekly standard or for work on weekends/holidays/outside the basic workweeks, and payments not for hours worked).  In an attempt to provide even greater clarity, the WHD’s proposal includes three illustrative examples, lists each of the requirements for using the fluctuating workweek method, and changes the title of the regulation from “Fixed salary for fluctuating hours” to “Fluctuating Workweek Method of Computing Overtime.”  As the WHD acknowledges, this proposal represents a departure from the WHD’s 2011 announcement that bonuses and premium pay are incompatible with the fluctuating workweek method of computing overtime, and newfound recognition that bonuses and premium payments are not only common, but also potentially beneficial for employees.

If adopted, the WHD’s proposed rule may result in more employers using the fluctuating workweek method of compensation, as it eliminates confusion about the availability of bonus pay, and likewise, it may prompt more employers to provide bonuses to salaried non-exempt employees.

Employers are encouraged to review the proposal in full and submit any comments by the December 5, 2019 comment deadline.

California law has specific requirements regarding the payment of final wages to terminated employees. The failure to comply with those requirements can require an employer to pay an individual up to 30 days of pay – known as “waiting time” penalties. As “waiting time” claims are often pursued in the context of class actions, where plaintiffs seek up to 30 days of pay for each former employee, it is critical that employers understand when final wages must be paid. And that deadline is different depending up whether the company has terminated the employment or the employee has quit.

Timing of Payment

Subject to a few limited exceptions, including employees covered by collective bargaining agreements providing for different time limits and employees in certain industries, California Labor Code section 201 requires an employer that discharges an employee to pay the employee’s final wages immediately, meaning at the time of termination. This includes not only involuntary terminations, but also an employee’s release at the end of a specified duration or project-based job assignment. However, different circumstances apply to an employee of a temporary service company upon completion of an assignment at the company’s client.

For employees who quit, final wages are due within 72 hours of resignation, or on the employee’s final day of employment if the employee gives more than 72-hours’ notice. Employees who quit without providing at least 72-hours’ notice may be provided their final wages by mail if they request and designate a mailing address. For the purposes of this requirement, the date of mailing constitutes the date of payment.

Method and Place of Payment

California Labor Code section 208 mandates that a discharged employee must be paid “at the place of discharge.”  It also mandates that a resigning employee must be paid “at the office or agency of the employer in the county where the employee has been performing labor.”

In terms of the method of payment, if an employee has authorized the employer to use direct deposit, the final payment may be paid by direct deposit. Otherwise, generally, the payment must be delivered to the departing employee in the time specified. At least one court has found that an employee was not “paid” by his employer when the employer when his final paycheck was allegedly intercepted. Accordingly, it makes sense to take measures to ensure that employees actually receive their final paychecks in the statutorily required period.

What Must Be Included

In addition to wages, any accrued vacation must also be paid to the employee within the time specified above.

Additionally, if an employment agreement provides for unconditional severance pay, there is an argument that those severance payments are “wages” and must also be paid in the statutorily required time.


Under California Labor Code section 203, an employee may receive “waiting time” penalties of up to 30 days’ wages for violations of Labor Code sections 201–202. Under that section of the Labor Code, if an employer “willfully fails to pay, without abatement or reduction,” the wages of any departing employee in accordance with the law, the wages of that employee continue as a penalty up to 30 days at the employee’s daily rate of pay.

For example, an employee who had been working 8 hours per day at $20 per hour could be entitled to up to $4,800 in waiting time penalties. (8 hours per day x $20 per hour x 30 days = $4,800.) An employee may be entitled to as many days of waiting time penalties as the final wages were actually delayed.  IIf, for instance,  an employee’s final pay was two days late, the employee could receive two days of waiting time penalties.

Penalties may be assessed for two types of failure to pay wages at the end of employment. There is the “stand-alone” type, where an employer pays all wages due at the end of employment but does not do so in a timely manner. That timing is addressed above.

Then there is a “derivative” type of violation, where the plaintiffs’ bar has advanced the theory that if an employee was not paid all wages due during employment (e.g., because the employee claims unpaid overtime), and the final wages paid still did not include prior unpaid amounts, then the payment of final wages at the end of employment was not sufficient and there are still owed but unpaid wages. And because there would still be owed wages, waiting time penalties would accrue. However, some courts, including the California Court of Appeal in September of this year, have found that a failure to pay meal or rest period premiums are not grounds for a derivative claim for waiting time penalties. (See Naranjo v. Spectrum Security Services, Inc. (Sept. 26, 2019, B256232) ___ Cal.App.5th ___ [2019 Cal.App.LEXIS 928], and our blog post here.)  Because waiting time claims are often predicated on other alleged wage-hour violations, including meal and rest period violations, this at least narrows the types of claims that plaintiffs may bring and may help plaintiffs agree to more reasonable settlements.

Putting It Together

Because “waiting time” penalties can be significant, it is important to ensure that employees are timely paid their final wages. Employers should put proper policies and procedures in place, including ensuring that paychecks are prepared and ready to be provided to employees on their last day of employment if they are being terminated.

In bringing meal and rest period claims on behalf of their clients, the plaintiffs’ bar has long argued that merely because there was an alleged meal or rest period violation, there were also “derivative” statutory violations entitling their clients to additional penalties.  By arguing that an employer is also on the hook for such penalties, plaintiffs’ attorneys argue that the potential exposure is greater.  And with greater potential exposure, employers will be more inclined to settle – or so the rationale goes.

These purported “derivative” violations have come in at least two forms.  One type of “derivative” violation the plaintiffs’ bar has advanced is the theory that, because an employee was allegedly denied a meal or rest period, and because the employee would thus be owed an hour of “premium” pay for such a violation, the employee’s wage statement was not accurate because it did not show the premium pay the employee allegedly should have been paid, but was not.  That theory has been nonsensical from the get-go because it ignored the primary purpose of California’s wage statement law – that employees be provided a statement showing a calculation of the wages that they were actually paid.  Nevertheless, the plaintiffs’ bar continued to push this theory.  Understandably so – the maximum statutory penalty for wage statement violations is $4,000.  And that would be for just one employee.

Another type of “derivative” violation promoted by the plaintiffs’ bar is similar to the above – that is, where an employee would be owed an hour of “premium” pay for an alleged meal or rest period violation, and the employee resigned or was involuntarily terminated and not paid that premium pay with their final wages, that “waiting time” penalties are also owed.  But more than seven years ago, the California Supreme Court confirmed that a meal or rest period claim is not a claim brought for the nonpayment of wages.  So even if a meal or rest period premium constituted a “wage” for some purposes, a failure to pay such a premium would not constitute a failure to pay wages due at the end of employment.  Still, the plaintiffs’ bar continued to push this theory.  And again, understandably so – the maximum statutory penalty for waiting time violations is 30 days’ worth of pay at the employee’s daily rate of pay.  For an employee working 8 hours per day at $20 per hour, that would be $4,800.  Again, that would be for just one employee.

These issues have been frequently litigated over the years, with federal district courts coming out on either side, surely leading some employers to settle for greater amounts than they should have.  But on September 26, 2019 in Naranjo v. Spectrum Security Services, Inc., the California Court of Appeal may have put an end to these disputes.  The Court expressly held that a failure to pay meal or rest period premiums cannot support a claim for derivative wage statement penalties or waiting time penalties.  That is significant because employers now have sufficient ammunition to push back on these theories that have been pursued by plaintiffs’ attorneys to drive up settlement costs.

Whether the plaintiff seeks review from the California Supreme Court, and whether the California Supreme Court reverses Naranjo, is uncertain. For now, at least, Naranjo should provide California employers with ammunition to dispose of certain claims and to resolve cases more reasonably.

As employers with operations in California had feared, Governor Gavin Newsom has signed AB 51, which effectively outlaws mandatory arbitration agreements with employees – a new version of a bill that prior Governor Jerry Brown had vetoed repeatedly while he was in office.

The bill not only prohibits mandatory arbitration agreements, but it also outlaws arbitration agreements in which employees must take an affirmative action to escape arbitration, such as opting out.

And as the statute is written in broad terms that extend to waivers of statutory “procedures,” it appears to extend not just to arbitration of an employee’s claims, but also to waivers of jury trials and of class actions.

In short, effective January 1, 2020, an employer may only enter into an arbitration agreement with an employee in California (or a jury trial or class action waiver) if that employee voluntarily and affirmatively chooses to enter into such an agreement.  And the employer may not retaliate against an employee who chooses not to enter into such an agreement.

The analysis of the Senate Rules Committee demonstrates that the legislature was well aware that a bill prohibiting arbitration agreements could be challenged as being preempted by the Federal Arbitration Act (“FAA”).

As the bill’s author stated, “The Supreme Court has never ruled that the FAA applies in the absence of a valid agreement.  AB 51 regulates employer behavior prior to an agreement being reached.  Further, understanding the Courts’ hostile precedence toward policies that outright ban or invalidate arbitration agreements, AB 51 does neither.  Both pre-dispute and post dispute agreements remain allowable and the bill takes no steps to invalidate any arbitration agreement that would otherwise be enforceable under the FAA.  The steps help ensure this bill falls outside the purview of the FAA.”

Despite the attempt to draft a statute that avoids FAA preemption, only time will tell if such a preemption challenge is made and if it is successful.

If it is not enjoined, in whole or in part, the new legislation could have a great impact upon employers with operations in California, and upon pending and threatened litigation.

Thus, in California, it will be important for employers who wish to use arbitration agreements (or jury or class action waivers) to ensure that employees voluntarily and affirmatively elect to enter into such agreements.  This may require some employers to revise their agreements and to implement new practices.

Our colleague Jeffrey H. Ruzal a

Following is an excerpt:

The proposed rulemaking will codify the DOL’s recent guidance that an employer may take a tip credit for any amount of time an employee in a tip-earning occupation performs related non-tipped duties that are performed contemporaneously with, or within a reasonable time immediately before or after, the tipped duties.  The proposed regulations specifically identify a server’s tasks of cleaning and setting tables, toasting bread, making coffee, and occasionally washing dishes or glasses as related non-tipped duties that qualify as time for which a tip credit may be taken.  In addition to these examples, the proposed rulemaking provides that a non-tipped duty is related to a tip-related occupation if the duty is identified as a task of a tip-producing occupation in the Occupational Information Network (O*Net).  This is distinguishable, however, from work unrelated to the tipped occupation, which would then be considered a “dual job” for which a tip credit cannot be taken.

The proposed new rulemaking also reiterates the provision in the Consolidated Appropriations Act of 2018 that prohibits employers, managers, and supervisors from keeping any tips received by employees. …

Read the full article here.

In the fall of 2016, before the Obama administration increases to the minimum salary were set to go into effect (spoiler alert – they didn’t!), we wrote in this space about the challenges facing employers in addressing those expected changes: “Compliance with the New DOL Overtime Exemption Rule May Create Unexpected Challenges for Employers.

As we wrote earlier this week, the current administration’s changes are set to go into effect on January 1, 2020: “U.S. Department of Labor Issues Long-Awaited Final Rule Updating the Compensation Requirements for the FLSA’s Executive, Administrative, and Professional Exemptions.”

While the amounts of the new thresholds may be different than those expected to go into effect three years ago, the challenges are the same.  They are worth considering again – and soon.  January 1, 2020 will be here very, very soon.

The New Salary Thresholds

Effective January 1, 2020 the salary threshold for the executive, administrative, and professional exemptions under the federal Fair Labor Standards Act (“FLSA”) will increase from $23,660 ($455 per week) to $35,568 ($684 per week). This increase is but one of the changes that goes into effect on January 1.

The total annual compensation requirement for “highly compensated employees” subject to a minimal duties test will also increase from $100,000 to $107,432.

And employers may use commissions, nondiscretionary bonuses, and other incentive compensation to satisfy up to 10% of the salary requirement, provided that these payments occur no less frequently than annually, and subject to a single “catch-up” payment within one pay period of the close of the year.

On first glance, dealing with the increase in the minimum salaries for white-collar exemptions would not appear to create much of a challenge for employers—they must decide whether to increase employees’ salaries or convert them to non-exempt status. Many employers that have already reviewed the issue and its repercussions would likely disagree with the assessment that this is a simple task. The decisions not only impact the affected employees but also affect the employers’ budgets and compensation structures, potentially creating unwanted salary compressions or forcing employers to adjust the salaries of other employees.

In addition, converting employees to non-exempt status requires an employer to set new hourly rates for the employees. If that is not done carefully, it could result in the employee receiving an unanticipated increase in compensation—perhaps a huge one— or an unexpected decrease in annual compensation.

The Impact on Compensation Structures

For otherwise exempt employees whose compensation already satisfies the new minimum salaries, nothing need be done to comply with the new DOL rule. But that does not mean that those employees will not be affected by the new rule. Employers that raise the salaries of other employees to comply with the new thresholds could create operational or morale issues for those whose salaries are not being adjusted. It is not difficult to conceive of situations where complying with the rule by only addressing the compensation of those who fall below the threshold would result in a lower-level employee leapfrogging over a higher-level employee in terms of compensation, or where it results in unwanted salary compression. Salary shifts could also affect any analysis of whether the new compensation structure adversely affects individuals in protected categories. A female senior manager who is now being paid only several hundred dollars per year more than the lower-level male manager might well raise a concern about gender discrimination if her salary is not also adjusted.

The Impact of Increasing Salaries

For otherwise exempt employees who currently do not earn enough to satisfy the new minimum salary thresholds, employers have two choices: increase the salary to satisfy the new threshold or convert the employee to non-exempt status. Converting employees to non-exempt status can create challenges in attempting to set their hourly rates (addressed separately below).

If, for example, an otherwise exempt employee currently earns a salary of $35,000 per year, the employer may have an easy decision to give the employee a raise of at least $568 to satisfy the new threshold. But many decisions would not be so simple, particularly once they are viewed outside of a vacuum. What about the employee earning $30,000? Should that employee be given a raise of more than $5,000 or should she be converted to non-exempt status? It is not difficult to see how one employer would choose to give an employee a $5,000 raise while another would choose to convert that employee to non-exempt status.

What if the amount of an increase seems small, but it would have a large impact because of the number of employees affected? A salary increase of $5,000 for a single employee to meet the new salary threshold may not have a substantial impact upon many employers. But what if the employer would need to give that $5,000 increase to 500 employees across the country to maintain their exempt status? Suddenly, maintaining the exemption would carry a $2,500,000 price tag. And that is not a one-time cost; it is an annual one that would likely increase as the salary threshold is updated.

The Impact of Reclassifying an Employee as Non-Exempt

If an employer decides to convert an employee to non-exempt status, it faces a new challenge—setting the employee’s hourly rate. Doing that requires much more thought than punching numbers into a calculator.

If the employer “reverse engineers” an hourly rate by just taking the employee’s salary and assuming the employee works 52 weeks a year and 40 hours each week, it will result in the employee earning the same amount as before so long as she does not work any overtime. The employee will earn more than she did before if she works any overtime at all. And if she works a significant amount of overtime, the reclassification to non-exempt status could result in the employee earning significantly more than she earned before as an exempt employee. If she worked 10 hours of overtime a week, she would effectively receive a 37 percent increase in compensation.

But calculating the employee’s new hourly rate based on an expectation that she will work more overtime than is realistic would result in the employee earning less than she did before. If, for instance, the employer calculated an hourly rate by assuming that the employee would work 10 hours of overtime each week, and if she worked less than that, she would earn less than she did before—perhaps significantly less. That, of course, could lead to a severe morale issue—or to the unwanted departure of a valued employee.

What About State Laws?

The new salary thresholds apply to federal law.  Many states still have higher thresholds for exempt status – and different criteria – than federal law.  Employers must be mindful of more onerous state and local wage-hour laws in making any decisions pertaining to employee compensation.

EBG’s free wage hour app provides summaries of those federal, state and local laws.  (It will be updated shortly to address the new federal thresholds.) You can download the free app here.

What is considered compensable travel time pursuant to the Fair Labor Standards Act (“FLSA”) is not always clear or intuitive to employers, even for those who usually have a good handle on wage and hour laws. This blog post hopefully will simplify the requirements set forth in the U.S. Department of Labor’s (“DOL”) regulations and interpretive guidance to help clarify when employees must be paid for travel time.

Ordinary Home-to-Work Travel

Likely not a surprise for most employers, employees are not entitled to pay for time that they normally spend commuting between their homes and the work place.

And, keep in mind, this rule applies to employees who report to the same or different work sites.

If, however, a particular work site is well beyond the employee’s typical home-to-work commuting time, e.g. the employee lives five miles from his office, but is asked to commute 50 miles to an alternative work site for a discrete assignment, the employer should consider, for both legal and employee relations reasons, paying for such significantly longer commuting time.

Same Out-of-Town Day Travel

DOL regulations provide for a different rule for out-of-town travel – even if all of the travel and work is accomplished in one day. The regulations provide an example where an employee works in Washington, D.C. during the hours of 9:00 AM to 5:00 PM.

Assume the employee is asked to work on an assignment in New York City for one day, for which he must leave his house at 8:00 AM and arrives in New York City at 12:00 PM whereupon he starts to work. He completes the work at 3:00 PM, and arrives back in Washington, D.C. at 7:00 PM. How much, if any, should this employee be paid for traveling to New York?

The DOL takes the position that this travel cannot be considered normal (and non-compensable) home-to-work commuting, even if it is accomplished in one day. Rather, the DOL provides that such travel must be compensated because it is an integral part of the work to be performed. The regulations provide, however, that employers may deduct the time it took the employee to travel from his home to the train station, airport or bus depot, which is treated as the equivalent to normal home-to-work commuting time.

Travel That Is “All in a Day’s Work”

Employers are required to pay for all work-related travel time spent by employees throughout the course of the work day. This rule specifically applies to employees who travel as part of their principal activity from one job site to another.

Remember, however, that employers may still deduct normal home-to-work commuting, such as the time that an employee spends commuting from the last job site of the day to her home.

Overnight Out-of-Town Travel

Probably the most interesting and least intuitive travel time rule is overnight out-of-town travel. In these cases, the DOL requires employers to compensate employees for travel time that occurs during the employee’s normal work day.

For example, returning to our employee who works from 9:00 AM to 5:00 PM, he must be compensated for only his travel time that coincides with his normal work day.

What is more, this rule applies to any day of the week, even days on which the employee does not normally work. For example, an employee who typically works Mondays through Fridays, but travels for business during her normal working hours on a Saturday or Sunday must be paid for such travel time.

In addition, it is important to note that if an employee is offered public transportation, but requests to drive her own car instead, the employer may count as hours worked either the time spent driving the car or the time she would have had to count as hours worked during working hours if she had used public transportation.

Also, employers need not pay employees on out-of-town trips for their regular meal periods.

Lastly, employees must always be paid for any actual work they perform while traveling.

Other Considerations

Please keep in mind that this blog post addresses the legal requirements pertaining to travel time pay; however, employers may always pay for travel that does not necessarily require compensation pursuant to the FLSA and DOL regulations.

Also note that it is important to confirm whether the state or locality within which your traveling employees work does not have different, i.e. more rigorous, travel pay requirements than the FLSA. You should always consult your human resources specialist, internal or external counsel to make sure you are in full compliance with not only federal, but also state and local law requirements.

Lastly, it is always the best practice to provide clear guidelines to your employees in your employee handbook or as a standalone policy so there is no confusion on anyone’s part as to when employees should be compensated for travel time.

For the past four-plus years, the U.S. Department of Labor (“DOL”) has actively pursued revisions to the compensation requirements for the executive, administrative, and professional exemptions to the Fair Labor Standards Act’s overtime requirement.  On September 24, 2019, DOL issued its Final Rule implementing the following changes, effective January 1, 2020:

  • The new general minimum salary for these exemptions increases from the current level of $455 per week ($23,660 per year) to $684 per week ($35,568 per year).
  • The new minimum annual compensation threshold for the highly compensated employee version of these exemptions increases from $100,000 to $107,432.
  • Employers may use commissions, nondiscretionary bonuses, and other incentive compensation to satisfy up to 10% of the salary requirement, provided that these payments occur no less frequently than annually, and subject to a single “catch-up” payment within one pay period of the close of the year.

The current version of these regulations has been in place since 2004.  As we have discussed in earlier posts,* DOL first issued a proposal to update the regulations in July of 2015, with a Final Rule following in May of 2016.  The 2016 Final Rule would have increased the salary requirement to $913 per week ($47,476 per year), raised the highly compensated employee threshold to $134,004 per year, and provided for automatic updates to these levels every three years without further notice-and-comment rulemaking.  Various groups challenged the 2016 Final Rule in court, resulting in an injunction in November of 2016 barring implementation or enforcement of that rule.  That litigation has been on appeal, with the appeal stayed pending further rulemaking by DOL.

In March of 2019, DOL issued a Notice of Proposed Rulemaking suggesting a revised basic salary level of $679 per week ($35,308 per year), a highly compensated employee threshold of $147,414 per year, allowing certain bonuses and other incentive compensation to satisfy up to 10% of the salary requirement, and expressing a commitment to update the regulations every four years.  The Final Rule tracks the March 2019 proposal in most respects, with the general salary requirement increasing slightly in the Final Rule, the highly compensated employee threshold decreasing significantly, and the Final Rule eliminating any commitment to update the regulations on any particular timeframe in the future.  As with the 2016 Final Rule and the March 2019 proposal, the 2019 Final Rule makes no changes to the duties requirements for these exemptions.

In addition, to remove any doubt in the event of litigation over the 2019 Final Rule, DOL has formally rescinded the 2016 Final Rule.  This means that in the event that a judge were to enjoin or to invalidate the compensation standards specified in the new Final Rule, the regulations will revert to their 2004 version, rather than the levels set forth in the 2016 Final Rule.

The Final Rule also contains special salary levels for certain U.S. territories, and it updates the compensation requirements specific to the motion picture production industry.

Interestingly, and emblematic of how easy it is for employers to find themselves on the wrong side of the FLSA, DOL states in the Final Rule that the 10% allowance for non-discretionary bonuses and the like means that an employer can pay a minimum salary of at least $614.70 per week ($31,964.40 per year).  Those numbers, however, represent 90% of a weekly salary of $683 ($35,516 per year), which is $1 per week less than the salary standard adopted in the Final Rule, likely stemming from a failure to update the math during the drafting process.  The correct figures are a minimum salary of $615.60 per week ($32,011.20 per year).  Being off by just 90 cents per week could result in owing an employee thousands of dollars in back overtime (or owing a class of employees millions of dollars).

DOL estimates that these changes will cause approximately 1.2 million workers who are currently exempt to become overtime-eligible if their employers do not increase their compensation to satisfy these new requirements, and that the modest increase in the highly compensated employee threshold will affect roughly 101,800 employees.

With these new standards going into effect on January 1, 2020, it is important for employers to begin their planning now to ensure compliance by the effective date.  Although a number of advocacy groups have stated an intention to challenge this Final Rule in court, our expectation is that these new standards will become effective at the start of the new year.

In addition, employers must remain mindful of any requirements under state law that may affect overtime eligibility.  A number of jurisdictions, for example, do not recognize the highly compensated employee concept, while some states require higher salary levels than those in the FLSA regulations.

As always, you should consult your wage and hour counsel to ensure compliance with these new regulatory requirements.  It will be particularly important to think through carefully how to avoid costly errors when relying on the allowance for bonuses, commissions, and other incentive compensation.


*See our previous posts on the FLSA overtime regulations: