California Wage-Hour Law

In April 2018, we wrote about the California Supreme Court’s decision in Dynamex Operations West, Inc. v. Superior Court, which had clarified the standard for determining whether workers in California should be classified as employees or as independent contractors for purposes of the wage orders adopted by California’s Industrial Welfare Commission (“IWC”).

In Dynamex, the Court adopted the “ABC” test that has been used in some other jurisdictions.  Because Dynamex had adopted the “ABC” test for claims arising under IWC wage orders, there was some uncertainty after Dynamex regarding whether the new test would apply to claims that are not brought under a wage order.  The Dynamex Court did not consider or express a view about non-wage-order claims.

On October 22, 2018, the California Court of Appeal addressed that issue in Garcia v. Border Transportation Group, LLC, holding that Dynamex’s “ABC” test does not apply to claims not arising under a wage order.  The Garcia Court held that the widely used Borello standard applies to non-wage-order claims for determining whether workers are employees or independent contractors.

Although many wage-hour claims do arise under an IWC wage order, a number do not.  For example, certain claims for expense reimbursement under Labor Code section 2802, claims for wage statement violations under section 226, and claims for waiting time penalties under section 203 for an alleged failure to pay all wages due at the end of employment arise under the Labor Code only; there are no equivalent claims under any IWC wage order.

Following Garcia, entities doing business in California that have had actions filed against them alleging independent contractor misclassification based on Dynamex now have authority to argue that a number of claims should be dismissed.

The question whether an individual may be held liable for alleged wage-hour violations is one that occasionally arises in class action litigation – and, for obvious reasons, it is one that is particularly important to individuals who own entities or who are responsible for overseeing wage-hour compliance.

In Atempa v. Pedrazzani, the California Court of Appeal held that persons responsible for overtime and/or minimum wage violations in fact can be held personally liable for civil penalties, regardless of whether they were the employer or the employer is a limited liability entity. And the Court concluded that private plaintiffs may pursue and collect these penalties for “aggrieved employees” on behalf of the state of California through the Private Attorneys’ General Act (“PAGA”).

Defendant Paolo Pedrazzani was the owner, president, director, and secretary of Pama, Inc.. Two former employees filed a variety of wage-hour claims against Pedrazzani and Pama in July 2013, including claims for civil penalties on the basis of unpaid minimum wages (Cal. Lab. Code 1197.1) and unpaid overtime (Cal. Lab. Code 558). Following a judgment in favor of the employees that Pedrazzani and Pama were jointly and severally liable for the civil penalties, Pedrazzani appealed and Pama filed for bankruptcy.

The Court of Appeal held that Pedrazzani was personally liable for the civil penalties because “the Legislature has decided that both the employer and any ‘other person’ who causes a violation of the overtime pay or minimum wage laws are subject to specified civil penalties.” (italics original). And because neither statute mentions corporate structure, corporate form, or suggests that the same has any bearing on liability, it concluded that “the business structure of the employer is irrelevant.”

The Court also held that personal liability can attach even if a person has no formal relationship with the corporate employer (e.g., employee, manager, officer). Rather, for overtime violations, it is sufficient that that the “other person” was “acting on behalf of the employer”; and for minimum wage violations, it is sufficient that the “other person” “pays or causes to be paid less than the prescribed minimum wage.” Summarizing, the Court held that the statutes at issue “provide for an award of civil penalties against the person who committed the underlying statutory violations.”

After establishing the basis for Pedrazzani’s personal liability, the Court went onto explain that the former employees had standing to seek and collect the penalties under PAGA, and that such penalties are subject to the standard division between the aggrieved employees and the State (25% to the former; 75% to the latter).

Unfortunately, the Court did not address the standard or evidentiary showing needed to establish that someone is an “other person” who can be held personally liable for the civil penalties.

On August 13, 2018, in Ehret v. WinCo Foods, the California Court of Appeal held that a provision in a collective bargaining agreement (“CBA”) regarding employees’ meal periods during shifts lasting between five and six hours effectively waived employees’ rights under California Labor Code section 512. In so holding, the Court held that the waiver in question passed the “clear and unmistakable” standard used to determine whether a provision in a CBA is intended to waive a statutorily protected right. Although WinCo argued that the “clear and unmistakable” standard only applies to waivers of “non-negotiable” rights, not “negotiable” rights like a meal break for shifts between five and six hours, the Court avoided that question and found that, even assuming that the standard applies to waivers of any statutory right, negotiable or non-negotiable, the waiver in the WinCo CBA was “clear and unmistakable.”

California Labor Code section 512(a) states, in part: “An employer may not employ an employee for a work period of more than five hours per day without providing the employee with a meal period of not less than 30 minutes, except that if the total work period per day of the employee is no more than six hours, the meal period may be waived by mutual consent of both the employer and employee.” (Emphasis added.)

The WinCo CBA in question provided: “Employees who work shifts of more than 5 hours will be provided a meal period of at least 30 minutes, except that when a work period of not more than 6 hours will complete a day[‘]s work, a meal period is not required…. It is WinCo Foods policy not to mutually agree with employees to waive their lunch period.” (Emphasis in original.)

The Court held that the agreement effectively waived employees’ meal periods because it explicitly stated that no meal period is required for shifts of under six hours. Because that provision was “flatly irreconcilable” with Labor Code section 512, the Court held that it was a “clear and unmistakable” waiver of that statutory provision. Importantly, the Court distinguished cases that concern arbitration clauses in CBAs, which have held that statutory rights must be clearly stated in the agreement before they can be waived. The Court also rejected the employees’ contention that, under Choate v. Celite Corporation, 215 Cal. App. 4th 1460 (2013), to be valid, the waiver must either cite to the applicable statute explicitly or “specify the content of the statutory right.” Rather, the Court interpreted Choate to hold that the waiver need only “mention” the statutory protection.

The Court found of no import that the CBA also stated: “It is WinCo Foods policy to not mutually agree with employees to waive their lunch periods.” The Court held that that section of the agreement referred to waivers by individual employees, and had no effect on the collective waiver in question. The Court also flatly rejected the employees’ argument that a waiver must explicitly use the words “waiver,” “waived” or “waiving.”

This decision is welcome news to employers that have similar provisions in their CBAs. However, it is not binding upon other Courts of Appeal, and should the California Supreme Court decide to review the issue, it may well reach a different conclusion.

On July 11, 2018, the California Supreme Court accepted the Ninth Circuit’s request to answer several questions of California law relating to wage statements and payments of wages to certain classes of employees.

Arising out of two class actions against airlines – Vidrio v. United Airlines, Inc. and Oman v. Delta Air Lines, Inc. – the questions specifically concern employees who do not work primarily in California, and/or are covered by collective bargaining agreements, as well as certain classes of pay-averaging formulas. The California Supreme Court’s answers to these questions could have a great impact on employers doing business in California, particularly those who are based outside the state, and also those whose employees occasionally work in the state.

In United, the California Supreme Court will answer the following questions:

  1. Does California Labor Code section 226 apply to wage statements provided by an out-of-state employer to an employee who resides in California, receives pay in California, and pays California income tax on her wages, but who does not work principally in California or any other state?
  2. The Industrial Wage Commission Wage Order 9 exempts from its wage statement requirements an employee who has entered into a collective bargaining agreement (CBA) in accordance with the Railway Labor Act (RLA). . . . Does the RLA exemption in Wage Order 9 bar a wage statement claim brought under California Labor Code section 226 by an employee who is covered by a CBA?

The answer to the first question is especially important to transportation companies like airlines, where employees do not regularly work in any one state but instead have heavily variable schedules. As to the second question, should that exception apply to section 226, employers with workers subject to any CBA, and not only those under the RLA, could potentially avoid extraordinary penalties for alleged wage statement violations.

In Delta, the California Supreme Court will answer the following questions:

  1. Do California Labor Code sections 204 and 226 apply to wage payments and wage statements provided by an out-of-state employer to an employee who, in the relevant pay period, works in California only episodically and for less than a day at a time?
  2. Does California minimum wage law apply to all work performed in California for an out-of-state employer by an employee who works in California only episodically and for less than a day at a time?
  3. Does the [California Court of Appeal’s] bar on averaging wages apply to a pay formula that generally awards credit for all hours on duty, but which, in certain situations resulting in higher pay, does not award credit for all hours on duty?

The answers to the first two questions could have great consequences for out-of-state employers whose employees do not often work in California. As for the third, should the Court rule that such formulas are exceptions to the ban on wage averages, employers in industries where it is difficult to track and pay wages to an exact degree may wish to implement such a system. This would include employers whose workforces are not confined to a single office or retail area. This would provide greater flexibility to such employers when fashioning their payment policies.

On July 18, 2018, the Ninth Circuit issued a published opinion in Rodriguez v. Taco Bell Corp., approving Taco Bell’s on-premises meal periods for employees who choose to purchase discounted food.

Like many food services employers, Taco Bell offers discounts on its food to its employees. And it requires that employees consume such food on premises.

In Rodriguez, employees contended that requiring employees to consume discounted meals on premises results in a meal period or unpaid wage violation, arguing that employees must be relieved of all duty and must be permitted to leave the premises during a statutory meal period. The Ninth Circuit rejected those arguments.

As the Court explained, Taco Bell employees were not required to purchase meals – “[t]he purchase of the meal is entirely voluntary.” And the “requirement that [a discounted] meal be eaten on the premises was to ensure that the benefit was utilized only by employees and that the food did not leave the premises to be given to friends and family.” That is, “employees had to consume the discounted food in the restaurant to prevent theft.” As the Court noted, Taco Bell “employees are free to purchase meals at full price and eat them wherever the employees wish.”

The Ninth Circuit concluded that Taco Bell satisfied its meal period and wage obligations by relieving employees of all duties during their meal periods and exercising no control over how or where they spent their meal periods. That is, “employees were free to use the meal break time as they wished, and that a requirement to remain on the premises was imposed only if an employee voluntarily chose to purchase a discounted meal.” And there was no evidence that Taco Bell “required or pressured [employees] to conduct work activities while on premises during the meal period.” The policy actually prohibited that, requiring employees who purchased discounted meals to eat them away from the food production and cash register area.

The Ninth Circuit’s Rodriguez opinion confirms that employers that relieve employees of all duty during meal periods do not violate California law merely by imposing certain requirements to benefits (e.g., discounted food) that an employee may voluntarily accept.

More than 7 months after hearing oral argument on an issue that will affect countless employers across the country – whether employers may implement arbitration agreements with class action waivers — the United States Supreme Court has issued what is bound to be considered a landmark decision in Epic Systems Corp. v. Lewis (a companion case to National Labor Relations Board v. Murphy Oil USA and Ernst & Young LLP v. Morris), approving the use of such agreements.

The decision will certainly have a tremendous impact upon pending wage-hour class and collective actions, many of which had been stayed while the courts and parties awaited the Supreme Court’s decision.  And it is likely to lead many more employers to implement arbitration agreements with class action waivers going forward, if only to avoid the in terrorem effect of those types actions.

In a 5-4 vote along the very lines that many commentators had predicted, with newest Supreme Court Justice Neil Gorsuch penning the majority opinion, the Supreme Court determined that the law is “clear” that class action waivers are enforceable under the Federal Arbitration Act (“FAA”) – and that they are not prohibited by the National Labor Relations Act (“NLRA”), as several Circuit Courts had concluded following the National Labor Relations Board’s (“NLRB”) DL Horton decision.

In reaching this decision, the Court took great pains to address – and reject – the various arguments presented by the former NLRB General Counsel, the related labor union and various amicus briefs submitted by the plaintiffs’ bar.  In so doing, the Court noted that for the first 77 years of the NLRA, the NLRB had never argued that class action waivers violated the Act; instead, the FAA and the NLRA had coexisted peacefully.  In fact, as the Court pointed out, as recently as 2010 the NLRB’s General Counsel had asserted that class action waivers did not violate the NLRA.

The decision is an unqualified victory for employers, particularly those who already have such arbitration agreements in place.  Given the prevalence of wage-hour class and collective actions, and the potential exposure in even the most baseless of suits, other employers would be wise to consider whether they, too, wish to implement such agreements.

Not unimportantly, the decision might give employers new grounds to argue that employees who sign such agreements are prohibited from pursuing representative claims under California’s Private Attorneys General Act (“PAGA”).  Even if those new arguments prove to be unavailing – to date, the California state courts have held that such claims cannot be compelled to arbitration because they belong to the state, not the employee –the Supreme Court’s decision could be used to require that an individual arbitrate his or her individual claims first such that he or she would not have standing to pursue the PAGA claims if the employer prevailed in arbitration.

And employers should be mindful that in some states (California again), an employer must pay virtually all of the costs of the arbitration process, a reality that has led more than a few plaintiffs’ lawyers to file multiple individual arbitrations in order to drive up employers’ costs to try to force them to the settlement table.

When California employees bring lawsuits alleging minimum wage, overtime, meal period or rest period violations, they typically bring additional claims that are purportedly “derivative” of these substantive claims.  One of these derivative claims is for wage statement (i.e., paystub) violations, alleging that because the employee was paid not all wages he or she allegedly earned, the wage statements he or she was provided were not accurate.

The maximum penalty for a wage statement violation under the California Labor Code is $4,000 per employee.  With such a significant potential penalty, it is no wonder that plaintiffs’ attorneys typically tack on these types of claims, especially in proposed class actions, driving up the potential value of a case.

On May 8, 2018, however, the California Court of Appeal published an employer-friendly decision that could operate to defeat these claims in many cases – if it is not reversed by the California Supreme Court.

In Maldonado v. Epsilon Plastics, Inc., ___ Cal.App.5th ___ (B278022, Apr. 18, 2018), the Court of Appeal confirmed that a wage statement claim fails as a matter of law when it is based on the alleged failure to show all wages purportedly “earned” but the wage statements accurately reflect the wages paid to the employee.  The Court agreed with the employer’s “commonsense position that the pay stubs were accurate in that they correctly reflected . . . the pay received” and held that a failure to pay wages “does not mandate that [employees] also receive penalties for the wage statements which accurately reflected the[] compensation” they were paid.

The Court of Appeal’s decision in Maldonado is a welcome one for employers that have had to face wage statement claims that are tacked on by plaintiffs’ lawyers for the purpose of increasing potential exposure.  Because this is the first published opinion directly deciding this issue, employers now have the tool necessary to seek to strike these claims.

Of course, it is possible that the California Supreme Court will review Maldonado.  If it were to do so, it would not be entirely surprising for the Court to reverse the decision, as the Supreme Court has done in other employment cases in recent years where the Court of Appeal had issued employer-friendly interpretations of the California Labor Code.

On April 30, 2018, the California Supreme Court issued its long-awaited opinion in Dynamex Operations West, Inc. v. Superior Court, clarifying the standard for determining whether workers in California should be classified as employees or as independent contractors for purposes of the wage orders adopted by California’s Industrial Welfare Commission (“IWC”). In so doing, the Court held that there is a presumption that individuals are employees, and that an entity classifying an individual as an independent contractor bears the burden of establishing that such a classification is proper under the “ABC test” used in some other jurisdictions.

Depending on the applicable statute or regulation, California has a number of different definitions for whether an individual is considered an entity’s employee. In Dynamex, the Court concluded that one of these definitions – “suffer or permit to work” – may be relied upon in evaluating whether a worker is an employee for purposes of the obligations imposed by the wage order. But the Court held that the Court of Appeal had gone too far in providing a literal interpretation of “suffer or permit to work” that would encompass virtually anyone who provided services.

The Court held that it is the burden of the hiring entity to establish that a worker is an independent contractor who was not intended to be included within the applicable wage order’s coverage.

To meet this burden, the hiring entity must establish each of the following three factors, commonly known as the “ABC test”:

(A) that the worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact; and

(B) that the worker performs work that is outside the usual course of the hiring entity’s business; and

(C) that the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.

The Court concluded that the “suffer or permit to work definition is a term of art that cannot be interpreted literally in a manner that would encompass within the employee category the type of individual workers . . . who have traditionally been viewed as genuine independent contractors who are working only in their own independent business.”

Following Dynamex, entities doing business in California that treat some workers as independent contractors will want to review their relationship under the “ABC test” to determine whether any or all such workers should be reclassified.

In 2012, we were proud to introduce our free wage and hour app.  Over the years, thousands of clients and potential clients have downloaded the app on their mobile phones and tablets.

For 2018, we are pleased to introduce a brand-new version of the app, available without charge for iPhoneiPad, and Android devices. See our press release here.

Importantly, the 2012 and 2014 versions of the app have been retired.  If you had downloaded them, you will need to download the new version.

The new version of the app includes wage-hour summaries for all 50 states, as well as D.C. and Puerto Rico.  And it includes updates for 2018, including new state minimum wages and tipped employee rates.

Now more than ever, we can say that the app truly makes nationwide wage-hour information available in seconds. At a time when wage-hour litigation and agency investigations are at an all-time high, we believe the app offers an invaluable resource for employers, human resources personnel, and in-house counsel.

Key features of the updated app include:

  • Summaries of wage and hour laws and regulations, including 53 jurisdictions (federal, all 50 states, the District of Columbia, and Puerto Rico)
  • Available without charge for iPhoneiPad, and Android devices
  • Quick access to, and a direct feed of, Epstein Becker Green’s award-winning Wage and Hour Defense Blog, which provides up-to-date commentary on wage and hour developments
  • Social media feeds from Twitter, Facebook, LinkedIn, and YouTube
  • Quick links to Epstein Becker Green’s attorneys and practices – and more!

If you haven’t done so already, we hope you will download the free app soon.  To do so, you can use these links for iPhoneiPad, and Android.

In November 2017, four convenience store franchisees brought suit in federal court against 7-Eleven, Inc., alleging that they and all other franchisees were employees of 7-Eleven. The case was filed in the United States District Court for the Central District of California, entitled Haitayan, et al. v. 7-Eleven, Inc., case no. CV 17-7454-JFW (JPRx).

In alleging that they were 7-Eleven’s employees, the franchisees brought claims for violation of the federal Fair Labor Standards Act (“FLSA”) and the California Labor Code, alleging overtime and expense reimbursement violations. The trial court granted judgment in 7-Eleven’s favor, concluding that 7-Eleven was not the four franchisees’ employer under California law or federal law.

The court noted that the franchisees’ “basic legal theory underlying [their] claims [wa]s that 7-Eleven’s restrictive policies and practices created an employment relationship between the parties.” The court concluded that because the franchisees could not establish an employment relationship, each of their claims failed.

For example, while 7-Eleven required the franchisees to keep their stores open 24 hours per day, 364 days per year, the court was persuaded by the fact that the franchisees themselves were not “actually required to work at the stores a particular number of hours or on particular days” – they could hire employees to meet these requirements. And while the franchisees argued that 7-Eleven controls the payment of all wages and instructs franchisee on pay practices, performance appraisals, and disciplinary actions, including worker terminations, that did not persuade the court because “the fact that a franchisor pays a franchisees’ employees’ wages does not create an employment relationship,” and the franchisees admitted that they have unfettered discretion to hire and fire employees and set wages.

Because the franchise agreements explicitly provided that franchisees “control the manner and means of the operation” of their stores and “exercise complete control over and all responsibility for all labor relations and the conduct of [franchisees’] agents and employees, including the day-to-day operations” of franchisees’ stores and employees, the court concluded that such minimal control was insufficient to make franchisees common law employees of 7-Eleven.

The federal court’s decision is a welcome one for franchisors that have sound franchise agreements and practices in place. It is certainly possible that the court would have reached a different conclusion had 7-Eleven’s franchise agreement or practices provided for 7-Eleven to have a greater right to exercise control over franchisees.  In light of this decision, franchisors should review their agreements and practices to ensure they do not have a right to control the wages, hours, or working conditions of franchisees.