On July 19, 2021, Delaware Governor John Carney signed legislation that will gradually increase the state’s minimum wage to $15 per hour by 2025. This is a substantial increase from Delaware’s current minimum wage of $9.25 per hour. The minimum wage requirements apply to all employers who employ individuals in the state.

Following the examples set by neighboring Maryland and New Jersey, Delaware’s minimum wage increase will occur in phases. Effective January 1, 2022, the minimum wage will increase to $10.50 per hour. Thereafter, the minimum wage will increase annually on the following schedule:

  • Effective January 1, 2023 – $11.75 per hour;
  • Effective January 1, 2024 – $13.25 per hour; and
  • Effective January 1, 2025 – $15 per hour.

In the event that a federal minimum wage ever exceeds Delaware’s minimum wage, the higher federal wage would apply.

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Christopher Shur, a Law Clerk – Admission Pending (not admitted to the practice of law) in the firm’s New York office, contributed to the preparation of this post.

California law generally requires employers to pay non-exempt employees a premium of one hour of pay for non-compliant meal and rest periods. Employers have typically paid such premiums by using the employees’ standard hourly rates. A new California Supreme Court decision requires employers to pay premiums at a higher rate when employees receive nondiscretionary compensation. This change in the law not only will require employers to adjust how they calculate meal and rest period premiums going forward, but it also exposes some of them to litigation for their past practices if they did not previously pay at the higher rates – despite the fact that, before this new decision, they had no reason to believe that premiums should be paid at those higher rates.

On July 15, 2021, in Ferra v. Loews Hollywood Hotel, LLC, the California Supreme Court held that, when an employer is obligated to pay a meal or rest period premium for failing to provide a compliant meal or rest period, that premium must be paid at the “regular rate of pay,” as that term of art is generally used for overtime purposes, rather than the employee’s base rate of pay. The “regular rate of pay” generally takes into account all nondiscretionary forms of wages, including hourly pay, shift differentials, piece-rate, commissions and incentive/production bonuses, among other forms.

In reliance on a number of federal decisions, many employers in California have understandably paid these meal or rest period premiums based on employees’ base rates of pay. The California Supreme Court has now made clear that such a practice does not comply with the Labor Code.

Equally significant, the Ferra decision appears to apply retroactively, meaning that many California employers are likely to face a new wave of class actions and Private Attorneys General Act lawsuits alleging that their past practices did not comply with the Ferra standard.

For employers that do not provide any form of compensation beyond an employee’s hourly wages, the Ferra decision should not affect their operations.  In those circumstances, the “regular rate of pay” would always be equal to the base rate of pay.

Following Ferra, however, entities doing business in California that provide some form of compensation beyond hourly wages will want to review their payroll practices and make necessary adjustments to ensure that that meal and rest period premiums are calculated at the correct amounts.

Effective July 1, 2021, Virginia employers must ensure that their pay practices comply with a new stand-alone overtime law called the Virginia Overtime Wage Act (“VOWA”). VOWA largely tracks the federal Fair Labor Standards Act (“FLSA”) in that it incorporates most FLSA exemptions and requires employers to pay 1.5 times a nonexempt employee’s regular rate of pay for all hours worked in excess of 40 hours each workweek. However, VOWA and the FLSA differ in several ways.

Determining an Employee’s Regular Rate of Pay

VOWA’s most significant divergence from the FLSA is the statute’s formula for calculating a nonexempt employee’s regular rate of pay.

For nonexempt employees paid on an hourly basis, the regular rate is the employee’s hourly rate plus other non-overtime wages paid or allocated to that workweek (e.g., commissions or bonuses), minus any applicable federal exclusions (e.g., gifts, reimbursements for travel expenses, and holiday pay), divided by the total number of hours worked in that workweek.

For nonexempt employees paid on a salary or other regular basis, the regular rate of pay is “one-fortieth of all wages paid for that workweek,” which includes the employee’s regular salary plus other non-overtime wages paid or allocated to that week, such as non-discretionary bonuses or commissions.

This formula appears to preclude employers from paying nonexempt employees a fixed salary that covers straight-time wages for hours worked in excess of 40 hours in a workweek, or from using the FLSA’s “fluctuating workweek” method for calculating overtime. Under the fluctuating workweek method, overtime pay is based on the average hourly rate, produced by dividing the employee’s fixed salary and any non-excludable additional pay (e.g., commissions, bonuses, or hazard pay) by the number of hours actually worked in a specific workweek. Naturally, this means the average hourly rate may change from week to week depending on how many hours the employee actually worked.

VOWA’s new formula for calculating overtime will also result in higher overtime payments. For example, a nonexempt employee paid a fixed weekly salary of $600 with no bonus pay who works 50 hours in a workweek would earn the following overtime under each law:

FLSA Fluctuating Workweek:

($600 Salary + $0 Bonus) ÷ 50 = $12 regular rate

$12 regular rate x 0.5 = $6 half-time rate

$6 half-time rate x 10 overtime hours worked = $60 of overtime owed

$600 salary + $60 overtime = $660 total compensation owed for the week

VOWA:

($600 Salary + $0 Bonus) ÷ 40 hours = $15 regular rate

$15 regular rate x 1.5 = $22.50 per hour overtime rate

$22.50 overtime rate x 10 hours of overtime = $225 of overtime owed

$600 salary + $225 overtime = $825 total compensation owed for the week

Employers should note that VOWA’s formula will necessarily result in larger recoveries for misclassified workers, especially when the higher overtime rate is extrapolated over an entire limitations period or across multiple employees proceeding collectively—an option that is now available to Virginia employees pursuing wage claims thanks to last year’s amendments to the Virginia Wage Payment Act.

Overtime Exemptions Under VOWA

VOWA creates some ambiguity regarding whether Virginia employers may continue to rely on certain FLSA overtime exemptions. Although VOWA’s definition of “employee” appears to incorporate most FLSA overtime exemptions, a later section limits the available exemption defenses to only the executive, administrative, professional, and outside sales exemptions, and certain transportation-related exemptions (e.g., for local delivery drivers). See Va. Code § 40.1-29.2(A), (D). The latter would effectively eliminate the FLSA’s computer professional exemption, among others. Further, although the Virginia Department of Labor and Industry (“DOLI”) recently published frequently asked questions (see Question #3) that suggest the computer professional exemption is available under VOWA, the same guidance contradicts the statute by leaving out the transportation-related exemptions explicitly included in VOWA’s definition of “employee.”

Extended Statute of Limitations for Overtime Claims

VOWA provides a three-year statute of limitations for aggrieved employees to bring an overtime claim, regardless of the circumstances. In comparison, the FLSA provides a two-year statute of limitations for overtime violations, or three years if the violation was willful.

The extended statute of limitations will not have immediate practical effect, however, because DOLI has clarified that it cannot investigate claims brought before July 1, 2021.

Expansion of Available Damages and Remedies for Overtime Violations

The FLSA provides liquidated damages equal to the amount of unpaid overtime wages. An employer may avoid such “double damages” if it can show that it acted in “good faith” and that the employer had “reasonable grounds” for believing its actions complied with the requirements of the FLSA.

Under VOWA, however, all overtime wage violations are subject to double damages, plus pre-judgment interest of 8 percent per year. Further, VOWA does not offer a “good faith” defense, but instead permits treble damages, and the same pre-judgment interest and reasonable attorney fees and costs, where the employer (i) had actual knowledge that it failed to pay the overtime wages due or (ii) acted in deliberate ignorance or reckless disregard as to whether it was paying all overtime wages owed.

What Virginia Employers Should Do Now

The increased potential wage and hour liabilities mean that Virginia employers should review their overtime pay practices and exemption classifications. Specifically, Virginia employers should review their employee classifications and consider whether it makes practical sense to pay all nonexempt employees on an hourly, rather than salary basis.

California law generally requires that non-exempt employees be paid 1.5 times their “regular rate of pay” for work performed beyond 40 hours in a week or 8 hours in a day – and twice their “regular rate of pay” for time worked in excess of 12 hours in day or beyond 8 hours on the seventh day of the workweek.

While “regular rate of pay” is not expressly defined in the California Labor Code, there should be few questions about what that rate is when an employee works at the same rate during the workweek.

But when an employee works at two (or more) different rates of pay during a single pay period, how does the employer calculate the overtime rate?

Employers typically use the “weighted average” method to calculate the overtime rate for such “dual-rate employees.” Under that method, which has been endorsed by the California Division of Labor Standards Enforcement (“DLSE”), the hourly rate is calculated by adding all hours worked by the dual-rate employee in the pay period and dividing that number by the total compensation for that period.

But is that the only method that can be used in California?

Perhaps not.

In Levanoff v. Dragas, the California Court of Appeal affirmed the trial court’s decertification of a subclass for dual rate overtime violations, and it approved the dismissal of a Private Attorneys General Act (“PAGA”) dual rate claim, both of which alleged that Buffalo Wild Wings violated the law by not using the “weighted average” method.  Instead, the Court approved the use of a different method used to calculate the overtime rate for Buffalo Wild Wings employees – the “rate-in-effect” method, by which employees are paid overtime at the rate in effect when the overtime hours begin.

The “rate-in-effect” method is approved under federal law in some circumstances.

The Court of Appeal concluded that the DLSE’s adoption of the “weighted average” method is not binding upon it, and that it therefore was not bound to accept the “weighted average” method as the exclusive method to calculate overtime rates.

Addressing the use of the “rate-in-effect” method, the Court looked at both the face of the policy and the net effect of that approach, analogizing it to the use of a time-rounding policy.

The Court concluded that the “rate-in-effect” policy was neutral on its face. And the Court concluded that the use of the “rate-in-effect” method actually resulted in Buffalo Wild Wings employees overall receiving more overtime pay than they would have received under the “weighted average” method.

The Court’s decision, however, is limited to the facts.  Indeed, the Court expressly stated that it was not addressing the overtime calculation method employers must “always” use, but instead was addressing whether the use of the “rate-in-effect” method was lawful “under the facts of the case.”

For that reason, the decision cannot be read to approve of the “rate-in-effect” method in all cases.  In fact, had the “rate-in-effect” approach worked to the detriment of the Buffalo Wild Wings employees, it would appear that both the trial court and the Court of Appeal would have reached the opposite conclusion.

Accordingly, before California employers adopt the “rate-in-effect” method, they would be wise to determine whether or not it would work to the detriment of employees.

On June 16, 2021, Hawaii enacted Senate Bill 793 (the “Act”), which repeals an exemption to the minimum wage for disabled employees, often referred to as “the disability subminimum wage.” The Act took effect immediately and requires all Hawaii employers pay disabled individuals no less than the state minimum wage.

Previously, Section 14(c) of federal Fair Labor Standards Act permitted Hawaii employers to pay individuals with disabilities less than the state minimum wage, which is currently set at $10.10.  However, the Act explains that the exemption, which was intended to “train and prepare individuals with disabilities to gain open-market competitive jobs,” has shown over time to “simply [provide] a subsidy for sheltered workshops that do not support movement of [workers] to competitive employment.” In repealing the exemption, the Act states that the exemption no longer fulfills its original purpose and instead has led to discrimination against individuals with disabilities.

Hawaii employers should take steps to ensure that they no longer rely on the disability subminimum wage exemption.

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

As we previously reported, starting in 2016 the District of Columbia by statute gradually increased its minimum wage to $15.00 per hour, and its tipped minimum to $5.00, effective July 1, 2020. However, included in the statute were provisions for subsequent increases of both these rates based on the annual average increase in the Consumer Price Index for All Urban consumers in the Washington Metropolitan Statistical Area. See D.C. Code §32-1003(a)(6) and (f)(2).  The D.C. Department of Employment Services (DOES) recently announced that pursuant to these provisions, effective July 1, 2021 the minimum wage for all employees will increase to $15.20 per hour, and the tipped minimum to $5.05. The same rate applied to the Living Wage Act covering various government contractors.

D.C. employers should make sure that their payroll systems are adjusted to reflect these new rates. They should also post the updated DOES poster available here.

On June 21, 2021, the U.S. Department of Labor (DOL) announced a new proposed rule related to when an employer may take a tip credit and pay a lower minimum wage to tipped employees performing so-called tipped and non-tipped duties.  The proposed rule appeared in the Federal Register on June 23, 2021 and is open for public comment until August 23, 2021.  The proposal shows employers the new road that President’s Biden’s administration is paving, which is a sharp turn away from the Trump administration’s approach.

The Fair Labors Standards Act (FLSA) allows employers to pay “tipped employees” a wage of at least $2.13 per hour and to count a portion of the tips as satisfying the federal minimum wage obligation, known as the “tip credit.”  The rules governing when an employer can take a tip credit for time spent on duties that do not directly and immediately generate tips has been the subject of subregulatory guidance for decades, which has evolved under various administrations.  In 2018 and 2019, President Trump’s DOL rescinded prior guidance on the issue and issued new interpretive material.  The DOL then incorporated that guidance into its December 30, 2020 Final Rule (the 2020 Tip Rule).  However, President Biden’s administration delayed implementation of portions of the 2020 Tip Rule until December 31, 2021, including the “dual jobs” portion of the rule addressing application of the tip credit to time spent on tasks that do and do not directly and immediately generate tips.

In the Notice of Proposed Rulemaking (NPRM) published this week, the DOL now proposes withdrawing the “dual jobs” portion of the 2020 Tip Rule and replacing it with a starkly different regulatory standard more in line with how the DOL viewed the issue at various times in the past, including during the Obama years.  Specifically, the DOL’s new proposal includes the following key changes and additions:

  • No “Related-Duties” Test: Under the “related duties” test from the 2020 Tip Rule, employers could take a tip credit for time a tipped employee spent performing related, non-tipped duties, as long as the non-tipped duties were performed contemporaneously with or for a reasonable time immediately before or after tipped duties.  The new NPRM would eliminate that test.
  • New Definition of “Tipped Occupation”: The new proposed regulations would define what it means for an employee to be engaged in a “tipped occupation” for purposes of when an employer may take a tip credit.  The proposed rule provides that an employee engages in a “tipped occupation” only when an employee performs work that either: (1) produces tips; or (2) directly supports the tip-producing work, if the non-tipped work is not performed for a substantial amount of time.  The proposed regulation describes “tip-producing work” as work that generally requires “direct service to customers” and views work that “directly supports tip-producing work” as activity that does not itself generate tips, but assists a tipped employee to perform the work for which the employee receives tips.  For example, the proposed regulations provide that a server’s “tip-producing work” includes waiting on tables, while “work that directly supports the server’s tip-producing work” includes cleaning the tables, folding napkins, preparing silverware, garnishing plates before serving the food, and sweeping under tables in the dining room.  Work that is “not part of a server’s occupation” includes food preparation and cleaning bathrooms.
  • New 20% Limitation on Untipped Work: The NPRM would codify the on-again, off-again 80/20 Rule for the first time.  Thus, if a tipped employee spends more than 20% of the workweek performing work that “directly supports . . . tip-producing work[,]” the employer may not take a tip credit for any time that exceeds 20% of the workweek.  Instead, the employer must pay the full minimum wage for that time.  This standard appears to differ significantly from DOL’s earlier 80/20 concept, insofar as the earlier iteration of 80/20 would have denied the tip credit for any time spent on so-called untipped work if that activity exceeded 20% of the workweek.  The current proposal, by contrast, denies the tip credit for only the excess above 20%.
  • New 30 Minute Limitation on Untipped Work: The NPRM would create a new 30-minute limitation on continuously-performed non-tipped, directly supporting work in order for an employer to take a tip credit.  Specifically, if a tipped employee performs non-tipped, directly supporting work for a “continuous period of time that exceeds 30 minutes,” the employer may not take a tip credit for any of that time.  Instead, under those circumstances, the employer would need to pay the employee the full cash minimum wage for the entire block of time spent on the non-tipped work.  Thus, an employer may be able to take a tip credit for a block of time a server performs directly supporting work, such as preparing tables for the next day at the end of a shift, but only if that time does not exceed 30 minutes.

The NPRM is a proposal to amend the tip credit regulations, not a binding standard.  The DOL is accepting comments on this proposal until August 23, 2021.  After the comment period closes, the DOL may issue a Final Rule, which may adopt the proposed language verbatim or modify the language in one or more significant ways.  While the matter remains under consideration at DOL, employers with tipped employees should begin to consider what compliance with the proposed standard might look like.  We are at least several months, and perhaps a year or more, away from the effective date of any Final Rule on this topic, and litigation regarding any Final Rule implementing the standard DOL now embraces seems likely.  Watch our blog for updates on further developments.

On May 28, 2021, the Ninth Circuit Court of Appeals delivered a win to Walmart in a lawsuit brought by Roderick Magadia (“Magadia”) alleging violations of California’s wage statement and meal break laws.

The Ninth Circuit overturned a $102 million dollar judgment issued by United States District Judge Lucy H. Koh – comprised of $48 million in statutory damages and $54 million in civil penalties under California’s Private Attorneys General Act (“PAGA”).  It did so because it found that Magadia lacked Article III standing because he could not establish that he suffered any alleged meal break violations, and because Wal-Mart had provided compliant wage statements – contrary to the finding of the district court.

Although Wal-Mart completely prevailed as to Magadia’s wage statement claims (judgment reversed and remanded with instructions to enter judgment for Wal-Mart), Magadia’s meal break claims were allowed to proceed in state court (judgment vacated with instructions to remand to state court).

Whatever becomes of the balance of Magadia’s lawsuit, the Ninth Circuit’s opinion dealt a blow to some of the more popular claims and/or theories in modern class action and PAGA litigation, specifically (1) wage statement violations predicated on not listing hours or rates attributable to multi-pay-period contingent compensation, (2) wage statement violations predicated on the timing of final wage statements (i.e., on separation vis-à-vis next regular payday) and the dates listed as the compensable period, and (3) whether PAGA’s single-injury standing can confer Article III standing for harms not suffered (it does not).

1) Background Facts and Claims

Magadia worked as a sales associate for Walmart from 2008 to 2016. On his final day of employment, Walmart provided him his final paycheck and a statement of final pay, which did not include pay-period start or end dates.  Walmart provided Magadia his final wage statement on the next regular payday, which listed the pay-period start and end dates as the beginning and end of the established pay period.

Magadia sued Walmart in state court, alleging three types of California Labor Code violations:

  • that Walmart’s wage statements violated Labor Code § 226(a)(9) because its adjusted overtime pay does not include hourly rates of pay or hours worked;
  • that Walmart violated § 226(a)(6) by failing to list the pay-period start and end dates in its Statements of Final Pay; and
  • that Walmart’s meal-break payments violated § 226.7 because it did not account for MyShare bonuses when compensating employees.

Magadia also sought derivative civil penalties for all three claims under PAGA.

Walmart removed the case to federal court.

2) Magadia’s Labor Code Claims

a) Magadia’s 226(a)(9) Claim – Failure to List Hourly Rates of Pay or Hours Worked

Walmart pays employees and issues them corresponding wages statements every two weeks. Each quarter, Walmart rewards high-performing employees with “MyShare” bonuses which are itemized on the corresponding wage statements as “MYSHARE INCT.”

Consistent with California law, Walmart paid bonused-employees retroactive overtime to account for the proportional increase in the quarterly overtime rate from the bonuses.  Walmart itemized these payments on the quarterly wage statements as a lump sum labeled “OVERTIME/INCT,” without any corresponding hourly rate or number hours worked.  It was the absence of those two data points that Magadia argued was unlawful.

b) Magadia’s 226(a)(6) Claim – Failure to List Pay-Period Start and End Dates on Final Wage Statements

When Walmart separated employees, it issued them a final statement of pay that, among other things, did not list the start or end dates of the pay period.  On the next regular payday following separation, Walmart issued the employees their final wage statements, which listed the established pay-period start and end dates.  Magadia argued that it was both unlawful to delay the final wage statement until the next regular pay day and that the payperiod end date on the final statement of pay should be listed as the separation date.

c) Magadia’s 226.7 Claim – Failure to Pay Premiums for Non-Compliant Meal Breaks

Walmart paid required statutory premiums whenever it allegedly failed to provide employees with a compliant meal break, but it did so at employees’ base hourly rates of pay. Magadia argued that this practice violated Labor Code § 226.7 because the premiums should have accounted for the MyShare bonuses and thus should have been paid at a higher rate.

d) Magaida’s PAGA Claims

Magadia sought derivative civil penalties under PAGA for all three claims.

3) District Court and Ninth Circuit Rationale on Magadia’s Standing for Wage Statement Claims

Both the district court and Ninth Circuit agreed that the omission of statutorily required information can constitute distinct and concrete injury sufficient to confer Article III standing.  Where the district court and Ninth Circuit differed is whether Walmart’s paystubs practices actually violated the applicable subsections of Labor Code 226(a), as explained below.

4) District Court and Ninth Circuit Rationale Regarding Walmart’s Compliance with Labor Code Section 226(a).

a) District Court’s Rationale In Finding Walmart Had Violated Labor Code § 226(a)(9)

In a May 11, 2018 summary judgment order, the district court held that Walmart’s failure to include any hourly rates or hours worked on the wage statements accompanying the MyShare bonus payments violated Labor Code § 226(a)(9);  however, the district court’s order did not provide any analysis or guidance on how Walmart should have (or could have) reflected those data points.  Moreover, because Walmart took no steps to include the additional data points after the summary judgment order, the district court found that Walmart had “knowingly and intentionally” violated Labor Code § 226(a)(9).

b) Ninth Circuit’s Rationale In Finding Walmart Had Complied Labor Code § 226(a)(9)

The Ninth Circuit found the district court’s conclusions to be in error, reasoning that the retroactive overtime payments were “artificial, after-the-fact rate[s] calculated based on overtime hours and rates from preceding pay periods that did not even exist during the time of the pay period covered by the wage statement.”  Citing Magadia himself as an example, the Ninth Circuit explained that his overtime adjustment “rate” was $.20, but there was no pay period in which Magadia worked at an overtime rate of $.20.  Thus, the Ninth Circuit concluded that retroactive overtime payments were not an hourly rate “in effect” during the MyShare pay periods for purposes of § 226(a)(9).

c) District Court’s Rationale In Finding Walmart Had Violated Labor Code § 226(a)(6).

In its summary judgment order, the district court agreed with Magadia’s interpretation of Labor Code section 226(a)(6) (i.e., final wage statements must be issued on the day of separation and that it should list (1) the start of the pay period and (2) the separation date as the pay period start and end dates – because those were “the dates for which the employee is being paid”).

Walmart did not change its practices after the summary judgment order, and thus the district court found that each final wage statement thereafter “knowingly and intentionally” violated the statute and that Walmart had no “good faith dispute” defense to liability.

d) Ninth Circuit’s Rationale In Finding Walmart Had Complied Labor Code § 226(a)(6)

The Ninth Circuit found that it was lawful for Walmart to issue final wage statements to separating employees on the next regular payday.  Because the statutory language is framed in the disjunctive (i.e., either/or), employers thus have the option to issue final wage statements either “semimonthly or at the time of each payment of wages[.]”  Therefore it was both lawful for Walmart lawfully chose the latter option and to list the pay-period start and end dates as the established pay-period start and end dates.

District Court and Ninth Circuit Rationale on Magadia’s Standing to Pursue Meal Period Penalties Under PAGA

a) District Court’s Rationale In Finding That Magadia Had Standing to Pursue Meal Period Penalties Under PAGA

Magadia was unable to establish that he personally suffered any meal break violations.  However, he was able to establish that other employees had suffered non-compliant meal breaks (due to Walmart’s own records). And because the district court had previously accepted Magadia’s position that meal premiums must be paid at a rate that accounted for, among other things, the MyShare bonuses, it found that those bonused-employees had been harmed.

Note: The California Supreme Court is reviewing the California Court of Appeal’s decision in Ferra v. Loews Hollywood Hotel, LLC, which held that such premiums may be paid at the base hourly rate.

Notwithstanding Magadia’s failure to establish that he suffered any meal break violations, the district court nonetheless found that Magadia had standing to pursue PAGA penalties for meal break violations suffered by other Walmart employees.  It did so, in large part, due to the California Court of Appeal’s decision in Huff v. Securitas Sec. Servs. USA, Inc., which held that so long as an employee has suffered one Labor Code violation, he or she has state-proxy status to pursue PAGA penalties for alleged Labor Code violations not personally suffered but allegedly suffered by others.

b) Ninth Circuit’s Rationale In Finding That Magadia Did Not Have Standing to Pursue Meal Period Penalties Under PAGA

While acknowledging that qui tam actions are “well-established exception[s]” to traditional Article III standing, and that the California Supreme Court has categorized PAGA as “a type of qui tam action,” (quoting Iskanian v. CLS Transp. Los Angeles, LLC), the Ninth Circuit explained its obligation to “look beyond the mere label attached to the statute and scrutinize the nature of the claim itself.”

The Ninth Circuit explained how PAGA does, and does not, “hew closely to the traditional scope of a qui tam action for an uninjured plaintiff to maintain suit under Article III.”  On the one hand, the Ninth Circuit found that PAGA shares the following characteristics with traditional qui tam actions: (1) PAGA plaintiffs serve as a “proxy or agent of the state” and represent the “same legal right and interest as state labor law enforcement agencies[,]” (2) PAGA plaintiffs “share a monetary judgment with the government[,] . . . with the government receiving the lion’s share[,]” and (3) “PAGA permits the government to dictate whether a private plaintiff may bring a claim in the first place.”

On the other hand, the Ninth Circuit found that PAGA is dissimilar to traditional qui tam actions in the following ways: (1) PAGA explicitly involves the interests of others besides California and the PAGA-plaintiff (i.e., nonparty “aggrieved employees”), (2) PAGA distributes non-state penalties to all “aggrieved employees,” not just the PAGA-plaintiff, (3) the collateral estoppel aspects of PAGA (which bind non-party aggrieved employees in addition to the state and PAGA-plaintiff) create an interest in the penalties for the non-party aggrieved employees, and (4) PAGA represents a full and irrevocable assignment of California’s rights to the PAGA-plaintiff.  That is because PAGA lacks any procedural controls, right to intervene, or other mechanism to ensure that California retains the right to control the action if the state does not exercise its “right of first refusal” within the administrative exhaustion period that begins with filing a PAGA Notice.

On balance, the Ninth Circuit held that PAGA’s features diverge too substantially from the traditional criteria of qui tam statutes, and thus PAGA could not confer Article III standing on Magadia because he did not personally suffer any meal period violations.

Lacking Article III standing, the Ninth Circuit instructed the district court to remand Magadia’s meal period claims to California state court.

6) Take-Aways For the Employer From the Magadia Opinion

The Magadia opinion has numerous implications for California employers.  First, it generally reinforces the widely held opinion that federal court is a more favorable venue for PAGA litigation than state court.  That is, Magadia makes clear that claims for failing to list “fictional” hourly rates or the number of hours worked when paying retroactive overtime (spanning several pay periods) have no legs in federal court; and because Magadia’s denial of Article III standing to injury-free plaintiffs could provide employers the chance to defeat certain claims for which a plaintiff does have Article III standing before the balance of a case is remanded to state court, as Walmart did in this matter.

Second, the Magadia opinion contains powerful and persuasive arguments as to how California state courts should interpret California’s highly-technical wage statement laws, which may be useful if a defendant is unable to remove a case to federal court.

Third, the Magadia opinion’s rationale that PAGA is not a traditional qui tam statute, and thus cannot confer Article III standing on an injury-free plaintiff reinforces certain arguments regarding the constitutional infirmity of PAGA – including some arguments that Epstein Becker & Green, P.C. is arguing before the California Court of Appeal in CABIA v. Becerra.

Finally, Magadia highlights the increasing complexity of PAGA litigation and the corresponding necessity of vigilant and competent counsel to prevent (if possible) or defend (if necessary) a PAGA lawsuit.  And given the thousands of PAGA notices filed each year, for most California employers, finding themselves in the PAGA-crosshairs is not a matter of if, but when.

On May 25, 2021, both houses of the Illinois General Assembly approved an amendment to the State’s Wage Payment and Collection Act (“the Act”).  The change would require employers who violate the Act to pay damages of 5% of the amount of any underpayment of wages, compensation, or wage supplements for each month following the date of payment during which the amount(s) owed remain unpaid.  This represents a 150% increase to the penalty, as the statutory rate before this amendment was 2%.  The measure will take effect immediately upon signature by Governor J.B. Pritzker.

The Act covers private employers as well as local government units, including school districts, but exempts state and federal employees.  It requires that wages for non-exempt workers be paid no less frequently than semi-monthly, and that executive, administrative, and professional employees, as defined by the federal Fair Labor Standards Act (FLSA) be paid on at least a monthly basis. It restricts the duration between the dates of wage earning and wage payment, depending on whether an employer’s pay period is weekly, bi-weekly, or semi-monthly, and sets forth specific rules for final payment of wages and compensation upon an employee’s separation from the employer.  Notably, the Act requires that Illinois employers pay departing employees the full monetary value of all unused vacation accruals at the employee’s final rate of pay and prohibits any employment contract or policy from providing for forfeiture of earned vacation time upon separation.  The Act also forbids employers from making any deductions from wages or final compensation unless they are required by law or valid order, for the benefit of the employee, with express written consent, or for certain statutorily authorized garnishments.

Failure to comply with the Act can cost an employer significantly: employees who are not paid in accordance with the mandatory timelines may file a complaint with the state’s Department of Labor or commence a lawsuit.  In addition to recovery of any underpayments and damages, a prevailing plaintiff will also be entitled to costs and attorney’s fees, and the employer will also be subject to fines of up to $1,000.  If an employer’s violation of the Act is deemed willful or fraudulent in nature, the employer will be deemed guilty of a misdemeanor as well.  Repeat offenders may be convicted of a felony.

The Act’s amendment changes only the severity of the penalty for non-compliance, not the substantive requirements imposed on employers.  Nonetheless, now is a good opportunity for Illinois employers to ensure that their exposure is limited by making certain that their pay practices are fully compliant with the Act.

For decades, the practice of motor carriers arranging for freight to be transported by independent owner-operators—i.e., independent contractors who drive their own trucks—has been ubiquitous. However, this practice is now under threat in California because of a recent court decision.

On April 28, 2021, in California Trucking Ass’n v. Bonta, No. 20-55106 (9th Cir. 2021) (“CTA v. Bonta”), the United States Court of Appeals for the Ninth Circuit addressed whether the broad preemption language of the Federal Aviation Administration Authorization Act of 1994 (“FAAAA”) precludes enforcement of California’s Assembly Bill 5 (“AB-5”) against motor carriers operating in California. (AB-5 is discussed here.) In a split 2-to-1 decision that may have enormous (adverse) implications for motor carriers operating in California, the Ninth Circuit held that the California Trucking Association (“CTA”) was unlikely to succeed on the merits of its lawsuit challenging AB-5 because it concluded that the FAAAA does not preempt AB-5.

By way of background, the FAAAA expressly preempts any state “law, regulation, or other provision having the force and effect of law related to a price, route, or service of any motor carrier  . . with respect to the transportation of property.”  49 U.S.C. § 14501(c)(1). This broad preemption serves the FAAAA’s “overarching goal”—i.e., to “ensure transportation rates, routes, and services that reflect ‘maximum reliance on competitive market forces,’ thereby stimulating ‘efficiency, innovation, and low prices,’ as well as ‘variety’ and ‘quality.’” Rowe v. N.H. Motor Transp. Ass’n, 552 U.S. 364, 378 (1992). In short, Congress enacted the FAAAA to “prevent States from undermining federal regulation of interstate trucking through a patchwork of state regulations.” Cal. Tow Truck Ass’n v. City & City. of San Francisco, 807 F.3d 1008, 1018 (9th Cir. 2015).

In Dynamex Operations W. v. Superior Court, 4 Cal. 5th 903 (2018), the California Supreme Court adopted the so-called “ABC test” for determining whether a worker is an employee or an independent contractor, which AB-5 subsequently codified.  (The Dynamex decision is discussed here.) Under this test, a worker is presumed to be an employee rather than an independent contractor unless all three of the following requirements are satisfied:

  1. The person is free from the control and direction of the hiring entity in connection with the performance of the work, but under the contract for the performance of the work and in fact.
  2. The person performs work that is outside the usual course of the hiring entity’s business.
  3. The person is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.

Cal. Lab. Code § 2775(b)(1).

In the CTA v. Bonta case, the district court held that AB-5’s “Prong B” is likely preempted by the FAAAA because AB-5 effectively mandates that motor carriers treat owner-operators as employees, rather than as independent contractors. Cal. Trucking Ass’n v. Becerra, 433 F. Supp. 3d 1154, 1165 (S.D. Cal. 2020). In other words, the district court reasoned that the FAAAA pre-empts AB-5 because under AB-5 “drivers who may own and operate their own rigs will never be considered independent contractors under California law.” Id. It therefore issued a preliminary injunction enjoining California from enforcing AB-5 against any motor carrier doing business in California.

The district court’s reasoning dovetails with other decisional law. In Schwann v. FedEx Ground Package Sys., Inc., 813 F.3d 429, 437 (1st Cir. 2016), the Court of Appeals for the First Circuit found that the FAAAA preempts the “B” prong of Massachusetts’s materially identical ABC test. The Court reasoned that because the ABC test “makes any person who performs a service within the usual course of the enterprise’s business an employee,” it “runs counter to Congress’s purpose to avoid ‘a patchwork of state service-determining laws, rules, and regulations” that the FAAAA was designed to preempt.  Id. at 438 (quoting Rowe, 552 U.S. at 373). Indeed, the Ninth Circuit had previously observed that “an ‘all or nothing’ rule requiring services to be performed by certain types of employee drivers” would “likely” be preempted by the FAAAA. Cal. Trucking Ass’n v. Su, 903 F.3d 953, 964 (9th Cir. 2018).

Nonetheless, the majority in CTA v. Bonta reversed the district court and held that the FAAAA did not preempt AB-5. The majority framed the inquiry as whether AB-5 “significantly related to rates, routes, or services . . . and thus [is] preempted,” or whether it has “only a tenuous, remote, or peripheral connection to rates, routes, or services” and therefore is not preempted. In finding that AB-5 fell within the latter category, the majority reasoned that while AB-5 may compel “a particular result at the level of a motor carrier’s relationship with its workforce”—i.e., the use of employees as opposed to independent contractors—“[i]t does not compel a result in a motor carrier’s relationship with consumers, such as freezing into place a particular price, route or service that a carrier would otherwise not provide.”

The majority’s holding seems to imply that, unless a law explicitly forces a motor carrier to charge a certain price, take a certain route, or perform a certain service, it will fall outside the FAAAA’s broad preemptive scope. The majority’s reasoning is questionable. If this ruling stands, AB-5 may compel California motor carriers to, among other things, reimburse drivers for any cost incurred in operating and maintaining vehicles, track and supervise drivers’ workings hours and meal and rest periods, pay drivers as employees (as opposed to bargained-for rates), and institute and supervise worker-safety programs.  See Cal. Lab. Code §§ 204, 226, 246, 1174(d), 2802(a), 6401.7. Surely this will “compel a result in the motor carrier’s relationship with consumers” in the form of increased costs. Rowe, 552 U.S. at 371 (“pre-emption occurs at least where state laws have a ‘significant impact’—specifically on prices, routes, or services”).

Moreover, as the dissent in CTA v. Bonta pointed out, because AB-5, in effect, mandates the use of employees, “the obvious conclusion is that AB-5 will significantly impact motor carriers’ services by mandating the means by which they are provided.” And, “[w]hether to provide a service directly through employees or indirectly through independent contractors is a significant decision in designing and running a business[.]”

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If CTA v. Bonta stands, California motor carriers will likely have to restructure their relationships with owner-operators.  However, it is possible that the CTA will ask the full Ninth Circuit court to hear the case, which seems likely as the opinion produced a powerful dissent. Alternatively, CTA may petition the Supreme Court to hear the case, which may decide to grant such a petition because the Ninth Circuit’s opinion appears to conflict with the First Circuit’s opinion in Schwann v. FedEx Ground Package Sys., Inc.

We will track the progress of this case, and provide updates as they come in.