On November 26, 2019, San Francisco Superior Court Judge Richard B. Ulmer ruled that the Federal Arbitration Act (“FAA”) might not apply to Uber drivers who are engaged in interstate commerce while driving passengers to or from international airports.

In his claims before the Division of Labor Standards and Enforcement (“DLSE”), driver Sangam Patel (“Patel”) seeks recovery of unpaid wages, overtime pay, vacation pay, meal and rest break premiums, and unpaid business expenses allegedly owed by Uber. Uber petitioned to compel arbitration of Patel’s (“Patel”) claims under the FAA.

The Labor Code provides a right to bring an action to collect wages notwithstanding the existence of an arbitration agreement. Cal. Lab. Code § 229. If the FAA applies, a written arbitration agreement “shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” 9 U.S.C. § 2. The FAA applies to any “contract evidencing a transaction involving commerce” that contains an arbitration provision. Id. The FAA does not apply, however, to “contracts of…workers engaged in foreign or interstate commerce.” Id., at § 1.

Notably, there is a distinction between the term “involving” for purposes of section 2 and the term “engaged in” for purposes of section 1.

As the California Court of Appeal explained earlier this year in Muller v. Roy Miller Freight Lines, LLC (2019) 34 Cal.App.5th 1056, 1062, “the [United States] Supreme Court reasoned the plain meaning of ‘engaged in’ interstate commerce in section 1 is narrower in scope than the open-ended phrase ‘involving’ commerce in section 2. Unlike section 2’s reference to ‘involving commerce,’ which ‘indicates Congress’ intent to regulate to the outer limits of its authority under the Commerce Clause’ and thus is afforded an ‘expansive reading,’ section 1’s reference to ‘engaged in commerce’ is ‘narrower,’ and therefore ‘understood to have a more limited reach,’ requiring ‘a narrow construction’ and a ‘precise reading.’” (Internal citations omitted.)

Uber argued that the FAA applies to its arbitration provision because it involves commerce as the Uber app is available to riders and transportation providers in over 175 cities across the United States. Relying on precedent that stands for the proposition that workers need only engage in activities that affect interstate commerce to be considered “engaged in interstate commerce,” the Labor Commissioner argued that Uber drivers such as Patel engage in interstate commerce when they transport passengers to and from international airports, thus rendering the FAA inapplicable.

The argument is similar to that raised Singh v. Uber Techs. Inc. earlier this year, where the U.S. Court of Appeals for the Third Circuit rejected Uber’s argument that a group of New Jersey drivers suing for unpaid overtime wages were required to arbitrate their claims. The Singh Court found that transportation workers who transport passengers may be exempt from the FAA if they are engaged in interstate commerce. Singh claimed that he frequently transported passengers on the highway across state lines, between New York and New Jersey. In light of the factual dispute as to whether Uber drivers engaged in interstate commerce, the Third Circuit sent the case back to the district court to decide, after discovery on the issue, whether Singh and the proposed class of Uber drivers engaged in interstate commerce. If they did, the FAA would not apply.

Consistent with the Third Circuit in Singh, Judge Ulmer granted the Commissioner’s request for limited discovery on the issue of whether Uber drivers engage in interstate commerce. Following that discovery, Uber may then re-calendar its petition for hearing.

The case bears watching as it may provide employees in some industries with arguments to try to circumvent the otherwise enforceable arbitration agreements that they signed with their employers. Ultimately, if Uber drivers are found to be engaged in interstate commerce such that the FAA is inapplicable, the FAA would not preempt their right to file suit under Labor Code section 229 notwithstanding any private agreement to arbitrate. But section 229 only applies to actions to collect due and unpaid wages. Any other claims – such as claims for missed meal or rest periods, failure to reimburse business expenses, or failure to provide accurate wage statements – would not be covered and, thus, should still be subject to a valid and enforceable arbitration agreement. It will be interesting to see if and how that issue is addressed.

On November 21, 2019, the Pennsylvania Department of Labor and Industry (“DLI”) formally withdrew new regulations that would have increased the minimum salary requirements for the Pennsylvania Minimum Wage Act’s (“PMWA”) white-collar exemptions.  The withdrawal occurred on the same day the state’s Independent Regulatory Review Commission (“IRRC”) was scheduled to consider the new requirements and rule upon them at a public meeting.

The Withdrawn Rule

The final rule was issued on October 17, 2019, and would have increased the minimum salary threshold for the PWMA’s white-collar exemptions (administrative, professional, and executive exemptions to overtime requirements) in three stages from $35,568 per year on January 1, 2020, to $40,500 the next year, until finally reaching a $45,500 annual threshold on January 1, 2022.

Starting on January 1, 2023, the rule would have continued to increase the minimum salary threshold every three years, with employers receiving just 30 days’ advanced notice of the increased threshold.  In addition, the rule also sought to make the PMWA’s duties test for the state’s administrative, professional, and executive exemptions align more closely with the corresponding exemptions under the federal Fair Labor Standards Act (“FLSA”).

What Happens Next

The sudden withdrawal of the rule was part of a compromise with state Senate Republicans.  In exchange for the withdrawal, the Senate passed Senate Bill 79, which will (1) increase the state’s hourly minimum wage rate over several years from $7.25 to $9.50, and (2) amend the PMWA so that its minimum wage and overtime requirements are applied in the same manner as the federal FLSA, except where a higher standard is specified by state law.

Pennsylvania employers will want to keep an eye on the legislation as it makes its way through the House as Governor Wolf’s administration has promised to resubmit the regulations to the IRRC for final approval if Senate Bill 79 does not pass.

Additionally, employers should remember that even without the state regulations, changes to the federal FLSA will increase the white collar salary threshold from $23,660 ($455 per week) to $35,568 ($684 per week) effective January 1, 2020.

As we wrote here in September 27, the new “white collar” salary thresholds under the federal Fair Labor Standards Act (“FLSA”)  are set to go into effect on January 1, 2020.

That deadline is sneaking up fast.

And, like waiting until the last minute to start holiday shopping, waiting until the last minute to make important decisions regarding the new thresholds may not be wise.

The New Salary Thresholds

Effective January 1, 2020, the salary threshold for the executive, administrative, and professional exemptions under the FLSA will increase from $23,660 ($455 per week) to $35,568 ($684 per week).

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

Employers will be permitted to 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.

At 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 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.

These are decisions that should not be left until December 31.

The Impact of Reclassifying an Employee as Non-Exempt

Employers may address the new threshold by converting employees from exempt to non-exempt. But 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 – and should not be left until December 31.

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.

In the meantime, the clock is ticking on the time for employers to make their decisions regarding the new salary thresholds.

As businesses throughout the State of California continue to grapple with the potential implications of AB5, a new law designed to make it more difficult for companies to treat workers as independent contractors, the California Trucking Association (“CTA”) is taking legal action.

As we previously wrote here, AB5 codified and expanded 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.

To satisfy the ABC test, the hiring entity must demonstrate that:

  • the worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact; and
  • the worker performs work that is outside the usual course of the hiring entity’s business; and
  • the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.

In an amended complaint filed on November 12, 2019 in the U.S. District Court for the Southern District of California, CTA seeks declaratory and injunctive relief that would bar the State of California from applying the ABC test to the trucking industry.

Among other things, CTA seeks a ruling that the “ABC test,” as applied to the trucking industry, is preempted by the Federal Aviation Administration Authorization Act of 1994 (the “FAAAA”). And it seeks an injunction prohibiting the Attorney General and California state agencies from attempting to enforce the “B” prong of the test.

CTA asserts that the FAAA preempts the “B” prong because it will effectively operate as a de facto prohibition on motor carriers contracting with independent owner-operators, and will therefore directly impact motor carriers’ services, routes, and prices, in contravention of the FAAA’s preemption provision.

CTA further contends that the test imposes an impermissible burden on interstate commerce, in violation of the Commerce Clause of the U.S. Constitution.  CTA asserts that the test would deprive motor carriers of the right to engage in the interstate transportation of property free of unreasonable burdens, as motor carriers would be precluded from contracting with a single owner-operator to transport an interstate load that originates or terminates in California.  Instead, motor carriers would be forced to hire an employee driver to perform the leg of the trip that takes place in California.

The litigation is still in its early stages.  However, given the fact that AB5 will go into effect on January 1, 2020, trucking businesses with operations in California should actively monitor developments in this case, and other potential challenges to AB5.

After a false start three years ago, the federal Department of Labor (“DOL”) will finally be rolling out an increased minimum salary threshold for employees qualifying under the “white collar” exemptions. The increase in the salary threshold for professional, administrative, and executive exemptions (making up the “white collar” exemptions) under the Federal Fair Labor Standards Act (“FLSA”) will become effective on January 1, 2020.

In order to qualify for one of these exemptions, there are three elements to meet:

  • The employee must be paid on a salary basis (rather than hourly);
  • The employee must be paid a minimum salary; and
  • The employee must perform certain duties to meet the test.

Effective January 1, 2020, the second prong – the minimum salary threshold –will increase from $23,660 ($455 per week) to $35,568 ($684 per week) for white collar workers under the FLSA.

As employers review their employees’ status as an exempt or non-exempt employee in connection with the FLSA changes, it’s also important to remember that certain states also have minimum salary thresholds for certain exempt statuses. Most of these salary thresholds are greater than the federal level, but important distinctions apply.

New York

In 2016, as the federal DOL was set to implement its first set of salary threshold increases, New York followed suit, but establishing a higher salary threshold that was set to increase annually to follow minimum wage increases for non-exempt employees. New York’s salary thresholds, like its minimum wage requirements, become effective on December 31 of each year (and not on January 1).

Unlike the federal regulations, New York’s minimum salary threshold applies only to the administrative and executive exemptions – and not the professional exemption. Employers in New York who rely upon the professional exemption need only comply with the federal salary threshold, and not the increased New York State threshold.

The minimum salary threshold for the administrative and executive exemptions will be subject to the following increases:

  • Employers in New York City
    • $1,125.00 per week ($58,500 annually) on and after 12/31/19 (the state no longer distinguishes between large and small employers in NYC)
  • Employers in Nassau, Suffolk, and Westchester Counties
    • $975.00 per week ($50,700 annually) on and after 12/31/19
    • $1,050.00 per week ($54,600 annually) on and after 12/31/20
    • $1,125.00 per week ($58,500 annually) on and after 12/31/21
  • Employers Outside of New York City and Nassau, Suffolk, and Westchester Counties
    • $885.00 per week ($46,020 annually) on and after 12/31/19
    • $937.50 per week ($48,750 annually) on and after 12/31/20

Also differing from federal law, New York State does not recognize a “highly compensated” employee exemption. Under the new FLSA regulations, the threshold will change on January 1, 2020 from $100,000 per year to $107,432.

California

Like New York, California has both a higher minimum wage and higher salary exemption threshold than federal law. California’s Labor Code Section 515 requires that in order to qualify for a white collar exemption, employees must earn two times the state minimum wage for “full-time employment,” which is defined to mean 40 hours per week.

As California’s minimum wage increases annually, the minimum threshold for exempt employees will increase in turn, on January 1 of each year:

Small Employers (25 or fewer employees)

  • $960 per week ($49,920 per year) on and after 1/1/20
  • $1,040 per week ($54,080 per year) on and after 1/1/21
  • $1,120 per week ($58,240 per year) on and after 1/1/22
  • $1,200 per week ($62,400 per year) on and after 1/1/23

Large Employers (26 or more employees)

  • $1,040 per week ($54,080 per year) on and after 1/1/20
  • $1,120 per week ($58,240 per year) on and after 1/1/21
  • $1,200 per week ($62,400 per year) on and after 1/1/22

California also sets a minimum hourly rate, monthly salary, and annual salary threshold for exempt computer professionals, which increases annually. Effective January 1, 2020, exempt computer professionals must earn $46.55 per hour, or $8,080.71 per month, or $96,968.33 per year.

Alaska

Similar to California, Alaska requires employees to earn two times the state minimum wage for the first 40 hours worked in order to meet the minimum salary threshold test for white collar exemptions. Effective January 1, 2020, the minimum salary threshold will increase from $791.20 per week ($41,142.40 per year) to $815.20 per week ($42,390.40 per year).

More to Come?

Pennsylvania and Washington State are both considering higher salary thresholds for exempt employees.

Pennsylvania’s proposal, affecting the three white collar exemptions, would become effective the date of the final rule making, so the date is uncertain, though expected to apply on January 1, 2020:

  • $684 per week on and after 1/1/20*
  • $780 per week on and after 1/1/21
  • $875 per week on and after 1/1/22

Washington’s proposal would apply to the three white collar exemptions and would gradually increase over the next few years:

Small Employers (50 or fewer employees in Washington)

  • $675 per week ($35,100 per year) on and after 7/1/20
  • $945 per week ($49,140 per year) plus an adjustment for the Consumer Price Index (“CPI”) on and after 1/1/21
  • $1,080 per week ($56,160 per year) plus an adjustment for CPI on and after 1/1/22
  • $1,215 per week ($63,180 per year) plus an adjustment for CPI on and after 1/1/23
  • $1,215 per week ($63,180 per year) plus an adjustment for CPI on and after 1/1/24
  • $1,215 per week ($63,180 per year) plus an adjustment for CPI on and after 1/1/25
  • $1,350.38 per week ($70,220 per year) plus an adjustment for CPI on and after 1/1/26

Large Employers (51 or more employees in Washington)

  • $945 per week ($49,140 per year) on and after 7/1/20
  • $1,080 per week ($56,160 per year) plus an adjustment for CPI on and after 1/1/21
  • $1,215 per week ($63,180 per year) plus an adjustment for CPI on and after 1/1/22
  • $1,215 per week ($63,180 per year) plus an adjustment for CPI on and after 1/1/23
  • $1,215 per week ($63,180 per year) plus an adjustment for CPI on and after 1/1/24
  • $1,350.38 per week ($70,220 per year) plus an adjustment for CPI on and after 1/1/25
  • $1,350.38 per week ($70,220 per year) plus an adjustment for CPI on and after 1/1/26

Additionally, Washington State is proposing a minimum hourly rate for exempt computer professionals:

Small Employers (50 or fewer employees in Washington)

  • $27.63 per hour on and after 7/1/20
  • $37.13 plus an adjustment for the Consumer Price Index (“CPI”) on and after 1/1/21
  • $47.25 plus an adjustment for CPI on and after 1/1/22

Large Employers (51 or more employees in Washington)

  • $37.13 per hour on and after 7/1/20
  • $47.25 plus an adjustment for CPI on and after 1/1/21
  • $47.25 plus an adjustment for CPI on and after 1/1/22

 Conclusion

As employers prepare for 2020, it’s important to remember that in reviewing an employee’s exemption status, the new FLSA regulations are not the only consideration – state salary thresholds may be significantly higher, and increasing over the next several years.

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.

Penalties

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.