Faced with the question of whether unionized employees and their employer can bargain away the right to be compensated for employer-mandated travel time, a California Court of Appeal has ruled that they in fact may not do so.  In Carlos Gutierrez v. Brand Energy Services of California, Inc., the Court concluded that Wage Order 16 (Cal. Code Regs., tit. 8, § 11160) requires that employees be paid for all employer-mandated travel time — and that it cannot be negotiated away by a union and the employer.

The plaintiff in the case was a journeyman scaffold worker at gasoline refineries. He and other employees were required to travel to and from work each day on the employer’s shuttle.

The plaintiff’s employment was governed by a collective bargaining agreement (“CBA”) negotiated with the company by the union representing the employees.

As part of the CBA, the union and the company had negotiated a provision by which the company would pay for mandatory post-shift travel time, but not mandatory pre-shift travel time. As a result, the employees were not paid for the 30 to 40 minutes spent traveling to work each work day on the company shuttle.

The plaintiff brought a putative class action for the failure to pay for the mandatory pre-shift travel time. The trial court concluded that such an agreement was permitted by the applicable Wage Order and entered summary judgment for employer.

Reversing the trial court’s decision, the Court of Appeal concluded that the applicable Wage Order allows an employer and a union to enter into a CBA that “expressly provides” for the waiver of the employees’ rights under section 5(A) to be compensated at the “regular rate of pay or, if applicable” the premium rate. The Court concluded that the provision does not override the requirement under section 4(B) that employees receive compensation not less than minimum wage for all hours worked. The Court further recognized that its interpretation was in harmony with Labor Code section 1194(a), which gives employees the right to minimum wage, as well as public policy considerations of protecting employees’ welfare and interests.

The Court reversed the grant of summary judgment and remanded the case for further consideration.

Only time will tell whether the company will seek review of the decision by the California Supreme Court, or how the California Supreme Court might resolve the issue.

As states across the country start to reopen their economies after COVID-19 shutdowns, many businesses are likewise preparing to have employees return to work.

However, before reopening, businesses will need to comply with numerous state and local protocols designed to ensure the health and safety of employees and consumers, including social distancing, maximum occupancy and one-way flow.

Even if not required, many employers are instituting employee temperature checks upon arrival at the workplace. While the U.S. Equal Employment Opportunity Commission recently endorsed the use of temperature checks during the pandemic, such screenings could potentially run afoul of the Fair Labor Standards Act and state wage and hour laws if employers do not pay their workers for the time they spend submitting to temperature screening, particularly where there is potentially substantial waiting time in doing so.

The FLSA provides that “the principal activity or activities which an employee is employed to perform,” are compensable, including tasks completed outside a regularly scheduled shift that are an integral and indispensable part of the principal activities.[1]

Principal activities are those the employee is employed to perform and “include any work of consequence performed for an employer, no matter when the work is performed.”[2] The FLSA does not, however, require compensation for time spent on “activities which are preliminary or postliminary to” an employee’s principal activities.[3]

An activity is integral and indispensable within the meaning of the FLSA “if it is an intrinsic element of the [employee’s principal] activities and one with which the employee cannot dispense if he is to perform his principal activities.”[4]

While this is a fact-dependent analysis, courts have determined that certain activities will satisfy this standard, and are thus compensable (1) if the activity is required and is for the employer’s benefit; (2) if undertaken to prepare for the performance of the principal activities; or (3) if intended to protect the employee against unusual workplace dangers.[5]

Some activities that have been found to be compensable time include:

  • Donning and doffing of nongeneric protective gear at the workplace before performing work in a lethal atmosphere;[6]
  • Detention officers’ security screening, lasting up to 11 minutes, and checking keys and equipment in and out;[7]
  • A slaughterhouse employee’s knife sharpening;[8]
  • A radiological technician’s powering up and testing of an X-ray machine;[9]
  • A K-9 police officer’s feeding, walking and training of his dog;[10] and
  • Lead-acid battery plant employees’ showering and changing clothes at the workplace to prevent lead poisoning as a result of their exposure to toxic materials used in the manufacturing process.[11]

In contrast, standard pre- and post-shift security procedures that are not related to employees’ principal activities are not considered compensable time under the FLSA. In Integrity Staffing Solutions Inc. v. Busk in 2014, the U.S. Supreme Court held that Amazon.com Inc.’s post-shift anti-theft employee screenings were neither a principal activity nor integral and indispensable to the retrieving or packaging of Amazon’s products.[12]

Integrity Staffing Solutions notwithstanding, federal and state laws may differ on whether or not employee security screening time is compensable.

For instance, earlier this year, the California Supreme Court held in Frlekin v. Apple Inc. that an employer must pay employees for time spent waiting and undergoing required exit searches of their personal items and devices, reasoning that such searches primarily serve the employer’s interests (i.e., to detect and deter theft) and are highly controlled by the employer — employees must take specific movements and actions during the searches.[13] Other jurisdictions, including Pennsylvania and New Jersey, are also expected to address this issue.

Workplace temperature screenings could be found to constitute a preshift activity to protect against a heightened workplace danger and/or an activity undertaken for the employer’s benefit, though it does not appear that this particular scenario has previously been contemplated by courts or the U.S. Department of Labor.

Heightened workplace dangers have previously been considered with respect to the employees who are themselves at potential risk on account of the job they are tasked to perform. While COVID-19 does not necessarily present the same type of inherent danger, such as working in a nuclear power plant, it arguably presents a palpable safety risk for co-workers who could be potentially exposed to the life-threatening virus.

Mandating temperature screening to help avoid spread may, at least arguably, be similar to requiring employees to don protective gear at the workplace, as both are employer-imposed prerequisites intended to protect the workforce.

However, because the potentially unsafe working conditions here are not a direct byproduct of the work performed by the employees, i.e., the risk of contracting COVID-19 is not inherent in or isolated to the workplace but rather is a risk common to the public at large that can affect anyone, whether at work or not, courts might not consider temperature checks to reach the level of importance to an employee’s principal activities such as the U.S. Supreme Court did in Steiner v. Mitchell, or the U.S. Court of Appeals for the Ninth Circuit did in Alvarez v. IBP Inc.[14]

Also potentially relevant is that many employers are implementing temperature checks due to state and local recommendations and in some cases, requirements.

In Bonilla v. Baker Concrete Construction Inc., the U.S. Court of Appeals for the Eleventh Circuit held that time spent by construction workers going through security screening on their way to the work site inside an airport was not compensable under the FLSA in large part because the screening was required by the Federal Aviation Administration, and the employer “did not primarily — or even particularly — benefit from the [FAA-required] security regime.”[15]

Under this reasoning, courts may conclude that even companies that voluntarily temperature screen employees need not compensate nonexempt employees for such time because these screens are aimed at preventing the further spread of the disease for the sake of employees, their families and the general public, whereas any benefit to an employer is arguably incidental.

Viewed another way, however, an employer’s implementation of health checks might be considered integral and indispensable because the risk of exposure to a highly contagious and potentially fatal virus is arguably not an ordinary risk of employment for anyone other than a limited group of medical professionals and others working in hospitals and some health care settings.

The bottom line is that there is presently no clear answer. Because this is a novel issue that is not yet settled, employers wishing to avoid risk would be wise to consider compensating nonexempt employees for health check-related time.

In addition, employers with unionized workforces should consult applicable collective bargaining agreements, or CBAs, before deciding whether to compensate employees for temperature check time. Section 3(o) of the FLSA provides that time spent “changing clothes or washing at the beginning or end of each workday” is excluded from compensable time under the FLSA if the time is excluded from compensable time pursuant to “the express terms or by custom or practice” under a CBA.[16]

While the donning and doffing analysis may arguably be analogous to temperature checks, it is unlikely that a court would extend the Section 3(o) exception to temperature checks given the exclusion’s text and legislative history unless there is language that the employer can point to in its CBAs that would support such a position.

Whereas the version of Section 3(a) originally introduced permitted an employer and employee to bargain away any activity performed by an employee provided that it was contained in the express terms, or was a custom or practice of a CBA, the final version limited the exclusion to just the time spent by the employee in changing clothes and cleaning their person.[17]

With that said, even if temperature check time definitively constitutes an activity that is preliminary to an employee’s principal activities and is thus not compensable under the FLSA, it may nonetheless constitute hours worked if the time is considered time worked under the employer’s CBA.

While it is unlikely that many existing CBAs expressly carve out temperature check time, a CBA could contain language to the effect of that pre- or post-entry activities required by law are noncompensable or some other equally broad language that could encompass time spent waiting for and undergoing a temperature check.

Originally published by Law360: “Cos. Should Consider Paying For Temperature Check Time.” Reprinted with permission.

 

[1] 29 U.S.C. § 254(a)(1), IBP, Inc. v. Alvarez , 546 U.S. 21, 30 (2005).

[2] 29 C.F.R. § 790.8.

[3] 29 U.S.C. § 254(a)(2).

[4] Integrity Staffing Sols., Inc. v. Busk , 547 U.S. 27, 33 (2014).

[5] Perez v. City of New York , 832 F.3d 120, 124 (2d Cir. 2016).

[6] See, e.g., Alvarez v. IBP, Inc. , 339 F.3d 894, 903 (9th Cir. 2003).

[7] Aguilar v. Management & Training Corp.  (10th Cir. 2020).

[8] Mitchell v. King Packing Co. , 350 U.S. 260, 262 (1956).

[9] Kosakow v. New Rochelle Radiology Assocs., P.C. , 274 F.3d 706 (2d Cir. 2001).

[10] Reich v. N.Y.C. Transit Auth. , 45 F.3d 646 (2d Cir. 1995).

[11] Steiner v. Mitchell , 350 U.S. 247, 256 (1956).

[12] 547 U.S. 27 at 34.

[13] See Frlekin v. Apple, Inc. , 457 P.3d 526 (Cal. 2020).

[14] See Dinkel v. MedStar Health Inc. , 99 F. Supp. 3d 37, 42-43 (D.D.C. 2015) (distinguishing battery-plant employees in Steiner from hospital workers with certain uniform maintenance activities that were important to the hospital’s infection control policy but were not essential to performing their jobs safely, as evidenced by the employees’ willingness to bring dirty uniforms home).

[15] 487 F.3d 1340, 1344 (11th Cir. 2007).

[16] 29 U.S.C. § 203(o).

[17] See U.S. DOL Wage and Hour Division Administrator’s Interpretation No. 2010-2 (June 16, 2010), available at https://www.dol.gov/agencies/whd/opinion-letters/administrator-interpretation/flsa/2010-2.

 

Many hospitality businesses, such as restaurants and bars, have found themselves restructuring their daily operations in light of the current global COVID-19 health crisis, and the subsequent federal, state, and local shelter in place orders. For instance, where restaurants and bars once served customers on a dine-in basis, perhaps they are now restricted to take-out only or delivery options, and, as a result, many employers who are still operating in the wake of the pandemic now have very few employees with customer-facing roles.

Because of the necessary changes in daily operations, many businesses are reconsidering their tip policies. Perhaps your policy was to allow employees to keep all tips he or she earned, which now seems unfair to employees who are integral to serving customers but no longer have direct customer contact so you want to shift to a tip pool model. Perhaps you have always operated on a tip pool model, but with ever-shifting job duties and positions, you are unclear whether your tip pool policy is legally compliant. Whatever the case, one thing is certain: given that daily operations of customer-service oriented businesses has likely changed and will continue to change as our country slowly moves toward reopening, now is the perfect time to revisit some important considerations if you are thinking about shifting to a tip pool model or even if you already have one.

The information provided below focuses on federal law and California law. However, it is important to note that your state may have unique requirements. Whatever your business’s unique circumstance, Epstein Becker & Green, P.C. can help you navigate tip pooling.

What is a tip?

Federal definition: A tip is a sum presented by a customer as a gift or gratuity in recognition of some service performed for him. It is to be distinguished from a payment made for the service. Whether a tip is to be given, and its amount, are matters determined solely by the customer. 29 CFR 531.52. Tipped employees are employees who customarily and regularly receive more than $30 per month in tips. 29 U.S.C.A. § 203(t).

California Definition: A tip or “gratuity,” as defined by the California Labor Code, is money a customer leaves for an employee (or employees) over the amount due for the goods sold or services rendered. Cal. Lab. Code § 350(d).

The basic rule is that tips belong to the employee. Employers are prohibited from using an employee’s tips for any reason other than as a credit against its minimum wage obligation (known as a “tip credit”) or in furtherance of a valid tip pool. California note: tip credits are not permissible under California law.

What is tip pooling?

Tip pooling involves taking tips earned by all employees during a certain period of time and redistributing them amongst other employees based on a pre-established formula. The employer must inform employees of tip pooling requirements and may not retain any of the tips for any other purpose. 29 C.F.R. § 531.54.

Is compulsory tip pooling legal?

Yes. Under federal and California law, employers can require employees to participate in tip pooling. See 29 U.S.C.A. § 203(m); Oregon Rest. & Lodging Ass’n v. Perez, 816 F.3d 1080, 1082 (9th Cir. 2016); Cal. Lab. Code § 351.

Who can participate in the tip pool?

It depends on whether the employer wishes to take a tip credit towards its minimum wage obligations.

Under the Fair Labor Standards Act (FLSA), an employer may take a tip credit toward its minimum wage obligation for tipped employees. 29 U.S.C.A. § 203(m). The tip credit must be equal to the difference between the required cash wage (at least $2.13 per hour) and the federal minimum wage of $7.25 per hour. As such, the maximum tip credit is $5.12 per hour ($7.25 minimum wage minus the minimum required cash wage of $2.13).

If the employer wishes to take the tip credit under the FLSA, the persons who can participate in the tip pool can include only employees who customarily and regularly receive tips. For instance, such employees would include waiters, bussers, bartenders, bellhops, and counter employees who serve customers. Employees who do not customarily and regularly receive tips, such as cooks, chefs, and dishwashers, may not participate in the tip pool.

On the other hand, if the employer does not take a tip credit for any tips received under the FLSA and pays its employees the minimum wage, it can include in the tip pool employees who do not customarily and regularly receive tips. In many circumstances, such employees would include back of house employees.

In California, Labor Code § 351 permits mandatory tip pooling with employees who either provide direct table service or are in the “chain of service.”

What persons cannot participate in a tip pool?

Federal law prohibits employers from keeping any portion of the tips or from including supervisors or managers in the tip pool. This is true regardless of whether the employer takes a tip credit or pays employees the full minimum wage. 29 U.S.C. § 203(m)(2)(A). Similarly, California law does not permit the employer or any “agents” of the employer to share in the tips. Cal. Lab. Code § 351; Jameson v. Five Feet Restaurant, Inc., 107 Cal. App. 4th 138 (2003).

What additional considerations should I be aware of?

  • Under federal law, employers must comply with a notice requirement if they intend to take a tip credit. The employer must notify the tipped employee, orally, or in writing, of the following:
    1. the amount of cash wage the employer is paying the tipped employee (which must be at least $2.13 per hour;
    2. the additional amount claimed by the employer as the tip credit (which cannot exceed $5.12 per hour);
    3. the tip credit claimed by the employer cannot exceed the amount of tips actually received by the employee;
    4. that all tips received by the tipped employee are to be retained by her except for a valid tip pooling arrangement limited to employees who customarily and regularly receive tips; and
    5. that the tip credit will not apply unless the employee has been informed of these provisions.
  • There are unique provisions regarding tip credits for employees who split time between job duties where tips are customarily and regularly earned and job duties where they are not. If the non-tipped work is related to the tipped work, the employer may take a tip credit for all hours worked. But if the non-tipped work is not related to the tipped work, the tip credit is limited to those hours in which the tipped work is performed. 29 C.F.R. § 531.56(d).
  • States often have different rules when it comes to tip credits. Please reach out to an attorney at Epstein Becker & Green, P.C., to ensure compliance with the unique requirements of your state.

During the Covid-19 pandemic, companies should focus in the first instance on health and safety issues for workers, customers, and the public at large during a pandemic, but they cannot lose sight of the wage and hour risks that are lurking in these challenging times.

For a staggering number of U.S. businesses over the past several weeks, the early and middle part of 2020 will look something like this:

Reduced customer demand or government-ordered site closures lead to furloughs or layoffs of a significant part of the workforce. Where feasible, employees work from home. As local conditions permit, operations gradually start to return to normal, though without the organization’s full complement of workers. The enterprise has weathered the storm.

Then the wage and hour class, collective, or representative litigation begins. Why? What went wrong?

Risks fall into three main phases that track business deceleration, maintenance, and resumption.

The Slow-Down / Shut-Down Phase

As employers have tried to reduce payroll, many have changed schedules from full-time to part-time, converted salaried employees to hourly, or reduced pay or salaries. Some jurisdictions require a certain amount of advanced warning of such changes, often in writing.

Businesses facing a sudden and unanticipated interruption in their cash flow have found themselves struggling to meet payroll. Failure to pay all earned wages, of course, or to pay them timely, can lead very quickly to litigation or agency enforcement action.

As companies let workers go via furlough or layoff, they must remain mindful of statutory or contractual obligations to pay out accrued paid time off and final earned wages, and to do so timely in accordance with any state jurisdictional requirements. In addition, furloughs for exempt employees that do not coincide with a full workweek can lead to claims under the Fair Labor Standard’s Act’s salary basis regulations.

When workers report for their scheduled shift but there is no work available for them, there may be an obligation to provide reporting time or show-up pay.

And employers should consider whether they have bonus or incentive plans or programs that may in some jurisdictions present a risk of claims for at least a pro rata payout from employees who were on track for a bonus and find themselves without a job.

Austerity and Survival Mode

Businesses trying to remain in operation in an era of social distancing and stay-at-home orders have seen many employees working from home as a solution, at least in the short run.

Work-from-home arrangements for businesses that had not previously developed and rolled out well thought-out policies and practices create a number of different concerns that could lead to wage and hour claims.

For example, timekeeping systems may be ill-equipped to capture all working time in remote work situations, inviting claims for off-the-clock work. Likewise, showing compliance with meal and rest period requirements may be challenging. And in some jurisdictions, claims may arise for certain expenses such as computer and telephone equipment, internet and telephone service, electricity, insurance, and even conceivably a portion of rent or mortgage obligations.

Where businesses have furloughed salaried exempt employees, it is important to resist the temptation to contact those workers from time to time with work-related questions, as at some point such contacts may be beyond de minimis and trigger an entitlement to a full workweek’s salary.

And where organizations reduce their active headcount or modifying job responsibilities, they should give consideration to whether the affected exempt employees will still meet the criteria for exempt status.

For example, under the altered working structure, do supervisors still oversee two or more full-time-equivalent direct reports? Do exempt employees still have an exempt primary duty? Or, in California, do they still spend more than half of their time engaged in exempt tasks?

Return to Normalcy

As businesses plan for restoring operations, many are contemplating temperature checks, additional pre-shift sanitizing, or other additions to the daily check-in procedure. These procedures may lead to claims that this activity is compensable work.

When employers start to increase wage rates and schedules to pre-pandemic levels, the same notice requirements mentioned above for compensation reductions may apply. And in some industries and localities, predictive scheduling laws may apply.

Some businesses may find it tempting to look to temporary staffing agencies, independent contractors, or other non-employee models for flexibility to hedge against uncertain demand and a potential second wave of the virus. Doing so, however, may lead to joint employment or worker classification claims.

What It All Means

Covid-19 presents one of the most serious challenges that the economy has faced in the past several decades. While a pandemic may allow businesses to invoke force majeure clauses to be relieved of certain contractual obligations, a pandemic does not allow employers to avoid obligations for wage and hour compliance, which are non-waivable.

Employers need to remain aware of the many ways that seemingly sensible business responses to economic crisis can lead to costly wage and hour litigation. For companies already under stress from the business disruption caused by the coronavirus pandemic, a major wage and hour case would be exactly the opposite of what the doctor has ordered.

Originally published by Bloomberg Law: “INSIGHT: Inoculating Against Covid-19 Related Wage and Hour Class Litigation.” Reprinted with permission.

For the second time this week, the U.S. Department of Labor’s Wage and Hour Division (“WHD”) has issued a Final Rule involving the overtime provisions of the Fair Labor Standards Act (the “FLSA”).  Following closely on the heels of the revisions to the section 7(i) exemption regulations discussed here, on May 20, 2020 WHD released its revisions to the regulations regarding the “fluctuating workweek” method of paying overtime to salaried non-exempt employees.  And, as with the 7(i) Final Rule, the fluctuating workweek Final Rule eliminates confusion caused by WHD’s previous rulemaking efforts.

What is the fluctuating workweek?

Under the FLSA, the requirement to compensate for overtime hours at a rate not less than one and a half times the employee’s regular rate of pay is straightforward enough for workers paid on an hourly basis, as that simply involves paying a premium of at least 50% of the employee’s hourly rate for each overtime hour worked, in addition to the hourly rate itself.  For example, an employee who normally earns $20 per hour must earn at least $30 per hour—i.e., the $20 straight-time rate plus the $10 overtime premium—for overtime work.

For non-exempt employees who receive a salary, the idea is similar: convert the salary into the hourly rate the employee would have received had he or she earned equal money working on an hourly basis during the week, and then pay the additional 50% premium.  This method of paying overtime is the fluctuating workweek method.  (Note that some states, including Alaska, California, New Mexico, and Pennsylvania do not allow this calculation under state law.)  An example of the calculation looks like this:

  • Assume that an employee receives a weekly salary of $600 and over the course of three weeks works 40, 50, and 60 hours.
  • For the first week, with 40 hours worked, there is no obligation to pay an overtime premium.
  • For the second week, the regular rate is $600 / 50 hours = $12 / hour, so the overtime premium is 0.5 * ($12 / hour) * 10 hours (i.e., 50 hours worked minus 40-hour threshold) = $60, for total weekly pay of $660 (i.e., $600 in salary plus $60 in premium overtime pay).
  • For the third week, the regular rate is $600 / 60 hours = $10 / hour, so the overtime premium is 0.5 * ($10 / hour) * 20 hours = $100, for total weekly pay of $700.

This way of calculating premium overtime for salaried non-exempt employees has been the norm since Overnight Motor Transportation Co. v. Missel, 316 U.S. 572 (1942), one of the first Supreme Court decisions interpreting the FLSA.  In 1968, WHD issued regulations based on Missel and formalizing the fluctuating workweek calculation, initially under the heading of “fixed salary for fluctuating hours.”  See 29 C.F.R. § 778.114.

What if an employee also receives a bonus, commissions, or other non-salary pay?

But what if an employee on a fluctuating workweek arrangement also receives a bonus, a shift premium, extra holiday pay, commissions, or other compensation in addition to the salary?  This question flew mostly under the radar for decades, with a handful of courts confirming that these additional items of compensation do not alter the fluctuating workweek calculation, but instead simply become part of the overall regular rate analysis.

Starting in the early 2000s, however, some courts began to conclude that the presence of non-salary compensation invalidates the fluctuating workweek.  These courts determined that where a salaried employee also receives other pay, the salary compensates for only a fixed number of hours, such as 40, and required employers to pay premium overtime pay at a rate more than three times the amount required under the fluctuating workweek for the salary portion of the pay.

The following example illustrates the differences between these two interpretations:

  • Assume that an employee receives a weekly salary of $600 and works 50 hours during a workweek, and that for the same workweek the employee also receives a $100 bonus.
  • Under the fluctuating workweek: The regular rate is $700 (i.e., $600 in salary plus $100 in bonus money) / 50 hours = $14 / hour.  The overtime premium is 0.5 * ($14 / hour) * 10 hours = $70, for total weekly compensation of $770.
  • Without the fluctuating workweek: The effect of the bonus on the regular rate is $100 / 50 hours = $2 / hour.  The effect of the salary on the regular rate is $600 / 40 hours (note: not 50 hours, as under the fluctuating workweek) = $15 / hour.  Added together, the result is a regular rate of $17 / hour.  The overtime premium is then ((0.5 * $2 / hour) (representing the additional half-time for the bonus) + (1.5 * $17 / hour) (representing the full additional time and a half attributable to the salary)) * 10 hours = $265, for total weekly compensation of $965.

In 2008, WHD issued a Notice of Proposed Rulemaking that proposed to amend 29 C.F.R. § 778.114 to state expressly that non-salary compensation does not invalidate the fluctuating workweek so long as the salary truly compensates for all hours worked, even if other forms of compensation also compensate for some or all of that working time.  WHD did not, however, issue a Final Rule concerning this proposal until 2011, following a change of administrations.  In the 2011 Final Rule, WHD declined to adopt the language it had originally proposed in 2008 regarding the fluctuating workweek, instead reversing course and declaring in the preamble to the Final Rule that additional non-salary compensation is not consistent with the fluctuating workweek after all.

In the aftermath of the 2011 Final Rule, courts found themselves even more confused about how to address this issue, including what weight, if any, to give to WHD’s shifting positions, coupled with the fact that the 2011 Final Rule did not actually alter any of the pertinent regulatory language.  In one particularly vexing instance, federal courts in two different states reached conflicting determinations as to the applicability of the fluctuating workweek with respect to the same employer and salaried non-exempt employees subject to the same bonus plan.

Because of the 2011 Final Rule, many employers either abandoned the fluctuating workweek or stopped paying salaried non-exempt employees bonuses and other non-salary compensation.  While they still had strong arguments available for applying the fluctuating workweek notwithstanding the presence of non-salary compensation, many employers concluded that the risk and cost of litigation outweighed the value to the business of using that overtime calculation.

WHD sets the record straight: bonuses and other non-salary compensation can coexist with the fluctuating workweek.

In its newly-issued Final Rule, which becomes effective 60 days after publication, WHD aims to put this issue to rest.  The Final Rule amends section 778.114 in several respects, the most notable of which is the express adoption of the following language in new subsection 778.114(a)(5):

Payment of any bonuses, premium payments, commissions, hazard pay, and additional pay of any kind is compatible with the fluctuating workweek method of overtime payment, and such payments must be included in the calculation of the regular rate unless excludable under section 7(e)(1) through (8) of the Act.

This new portion of the regulation makes it clear that WHD views the fluctuating workweek overtime calculation as available even where employees receive bonuses, commissions, and the like.  Employers may rely on this regulation, as of its effective date, in applying the FLSA.  It remains important, of course, to ensure compliance with state law as well.

What the Final Rule means in practice is that employers using the fluctuating workweek may now provide their employees bonuses and other types of non-salary payments with a significantly reduced level of risk that a court will later conclude that the fluctuating workweek is unavailable under the FLSA.  And employers that do not use the fluctuating workweek may want to reconsider that view now that bonuses and other similar payments can once again be part of the compensation package without wrecking the overtime calculations.

California law has specific requirements regarding the payment of overtime to employees. An employer’s failure to pay overtime—or failure to pay the correct overtime rate—can result in a litany of unintended Labor Code violations, which, in turn, can lead to enormous liability. Therefore, it is critical that employers understand when overtime is due and how to calculate the overtime rate of pay.

1.   When is overtime pay due?

In California, the general overtime requirement is that a nonexempt employee shall receive a premium of at least:

  • One and one-half times the employee’s regular rate of pay for all hours worked in excess of eight hours up to and including 12 hours in any workday, and for the first eight hours worked on the seventh consecutive day of work in a workweek;
  • One and one-half times the employee’s regular rate of pay for all hours worked in excess of 40 hours in any workweek; and
  • Double the employee’s regular rate of pay for all hours worked in excess of 12 hours in any workday and for all hours worked in excess of eight on the seventh consecutive day of work in a workweek.

There are, however, several exemptions from the overtime law specifying categories of workers who need not receive premium overtime pay. There are also exceptions to the overtime rules that alter the basis for calculating the premium.

2.   What is the hourly rate for the overtime calculation?

The hourly overtime rate depends on an employee’s “regular rate of pay.” Generally, the regular rate is an employee’s average earnings per hour over the course of a workweek, dividing all includable compensation by all hours worked. The regular rate of pay includes many different kinds of remuneration an employee receives, such as hourly earnings, salary, piecework compensation, non-discretionary bonuses, shift differentials, the value of meals and lodging, and commissions. A bonus is nondiscretionary, and included in determining the regular rate of pay, when it serves as compensation for hours worked, for production or proficiency, or as an incentive to remain employed by the same employer.

Certain payments do not factor into the regular rate of pay. Examples of the more common exclusions are gifts for special occasions; expense reimbursements; vacation, holiday, and sick pay; premium pay for Saturday, Sunday, or holiday work; and discretionary bonuses.

3.   Determining the regular rate

As noted above, the regular rate is ordinarily an employee’s total pay for employment in any workweek divided by the total number of hours actually worked. California courts treat overtime pay attributable to a “flat-sum” bonus (i.e., a bonus amount that is not dependent on the number of hours worked) differently. Employers must divide that type of bonus by only the total non-overtime hours worked, rather than by all hours worked, to determine the effect of those bonuses on the regular rate.

a.   Employees paid hourly

 The regular rate of pay for hourly nonexempt employees is the total amount for the workweek (excluding flat-rate bonuses), divided by the total hours worked.

b.   Employees paid by salary

 The regular rate of pay for salaried nonexempt employees equals 1/40th of the employee’s regular weekly salary, calculated as follows:

  • Divide the annual salary by 52 (weeks) to get the weekly
  • Divide the weekly salary by the number of legal maximum regular hours (40) to get the regular rate.

c.   Piece rate or commission

If employees receive commission or piece-rate pay, either of the following methods may be used:

  • Divide the total earnings for the week, including earnings during overtime hours, by the total hours worked during the week, including the overtime hours. For each overtime hour worked, the employee is paid an additional one-half the regular rate. This is the most commonly used method of calculation.
  • The piece or commission rate is the regular rate. The employee is paid one and one-half times this rate for production during overtime hours. This method is less common.

4.   Must an employer pay for unauthorized overtime?

Generally yes. California law requires that employers pay overtime, whether authorized or not, if the employer knew or should have known the employee was performing the work. California law does not requires that employers pay overtime if the employee deliberately prevented the employer from obtaining knowledge of unauthorized overtime.

An employer may discipline an employee if he or she violates the employer’s policy of working overtime without the required authorization.

5.   May an employer require overtime?

Yes, absent some other legal or contractual limitation on the employee’s hours of work. An employer may dictate the employee’s work schedule and hours, including overtime.

Under most circumstances, an employer may discipline an employee who refuses to work scheduled overtime. However, an employer may not discipline an employee for refusing to work on the seventh day in a workweek and is subject to a penalty for causing or inducing an employee to forego a day of rest. An employer’s obligation is to apprise employees of their entitlement to a day of rest and thereafter to maintain absolute neutrality as to the exercise of that right. An employer may not encourage its employees to forego rest or conceal the entitlement to rest, but is not liable simply because an employee chooses to work a seventh day.

From the time of its original enactment in 1938, the Fair Labor Standards Act has contained an exemption for certain employees of a “retail or service establishment.”  In 1961, the Department of Labor’s Wage and Hour Division (“WHD”) issued interpretive guidance to aid in determining whether an establishment is or is not “retail or service” for purposes of what was then the section 13(a)(2) overtime and minimum wage exemption.  Part of the test includes whether the business is in an industry in which a “retail concept” exists.  See 29 C.F.R. § 779.316.  WHD created two lists, each containing dozens of industries that the agency believed may (29 C.F.R. § 779.320) and may not (29 C.F.R. § 779.317) have a retail concept.

WHD issued that 1961 guidance without opportunity for public comment, and the guidance was effective immediately.  After amendments to the “retail” and “not retail” lists in 1970 and 1971, these interpretations have remained unchanged for roughly half a century.

Over the years, these two lists have faced significant skepticism in the courts.  WHD did not provide citations for most of the industries listed, and numerous courts have found the classifications illogical, inconsistent, and arbitrary.  In addition, the static nature of the lists does not accommodate changes within industries, including shifting marketing and sales strategies, evolving consumer habits, technological innovations, or other factors that could indicate the emergence or decline of a retail concept in a given sector of the economy.

Because of these regulations, businesses in many industries have faced troubling uncertainty in trying to evaluate whether they are, indeed, able to qualify as a “retail or service establishment.”  Although the section 13(a)(2) exemption is no longer on the books, the modern version of this exemption exists in section 7(i), which creates an overtime exemption for certain commissioned employees of a retail or service establishment.  Businesses on the “retail” list have regarded it as relatively safe to rely on WHD’s guidance in using the 7(i) exemption, but employers on the “not retail” list confront a more difficult set of choices, particularly as courts have increasingly declined to defer to these lists.  Moreover, establishments not on either list have faced confusion trying to sort out whether their industry is more like the businesses on one list or the other.

WHD has now acted to correct this situation.  On May 18, 2020, WHD announced that it has issued a Final Rule, effective immediately, withdrawing the portions of the interpretive guidance creating the “retail” and “not retail” lists.  As a result, 29 C.F.R. §§ 779.317 and .320 will no longer be part of the agency’s interpretations construing the section 7(i) exemption.  Instead, WHD will apply the general standards set forth elsewhere in the Part 779 guidance to determine whether a business qualifies as a “retail or service establishment.”

While this action is long overdue, WHD deserves credit for acknowledging its mistake and solving the problem it created so many years ago.

Let me be the millionth person to say that we are living in unprecedented times.

Well, unless you count the Spanish Flu, which few of us probably dealt with as that was more than a century ago.

And, not incidentally, few if any of the wage-hour laws employers deal with today were in place back then.

As employers navigate issues that they never imagined, there are more than a few myths circulating about wage-hour laws that are worth mentioning here – and worth debunking.

Myth No. 1: “Employees Won’t Sue Over Alleged Wage-Hour Violations Occurring During The COVID-19 Crisis”

The thinking behind this myth is that employees will recognize that these indeed are unprecedented times, that they understand employers are going through difficult times and having to address unusual issues swiftly, that they are grateful to have jobs during this time, and that they will cut those employers slack in recognition of those facts if employers don’t comply in full with wage-hour laws.

While it’s nice to think that the COVID-19 crisis will remind everyone of what is truly important in life and engender more understanding and good will, the idea that employees and their lawyers will refrain from filing wage-hour claims is baseless.

First, filing suits is how plaintiffs’ lawyers make their money – and some of them make lots of it.  They aren’t going to stop working.  In fact, they are highly incentivized to try to identify employers’ missteps and to try to recover as much as possible when they do.

Second, all indications are that employment lawsuits in general have continued to be filed at the same rate the past several months as beforehand.  In some jurisdictions, they have increased during the crisis.  That means that employees and their lawyers are not turning a blind eye toward perceived unlawful conduct.

Third, it’s not as if wage-hour laws have been suspended during the pandemic.  Have you seen an amendment suspending operation of the Fair Labor Standards Act (“FLSA”) in the past few weeks?  Me neither.

Trust me, if the FLSA or state or local wage-hour laws are ever suspended, we will post something about it on this blog immediately.

But it won’t happen.

Myth No. 2:  “Compliance With Wage-Hour Laws Is Not Required Under The Doctrine Of Force Majeure

The thinking behind this myth is that unexpected developments sometimes allow people and companies to avoid their legal obligations. Earthquakes, tornadoes, hurricanes, fires and other disasters sometimes allow you to avoid legal obligations, right?  If you hire someone to paint your house and your house burns to the ground the day before the painter shows up, you don’t need to pay the painter, right?

That’s the doctrine of force majeure.

And while the doctrine of force majeure is alive and well with regard to contracts that are impacted by unexpected developments https://www.workforcebulletin.com/2020/03/31/you-are-excused-force-majeure-and-the-workplace-in-the-covid-19-era/, there is no similar concept built into wage-hour legislation.  In other words, while force majeure might allow a company to escape contractual obligations, even those in an employment contract, where it will no longer get the benefits it contracted for, there is nothing in wage-hour laws that would allow employers to pay employees less than the minimum wage, or not pay them overtime at the overtime rate, or not pay them for all time worked, because this crisis was unexpected.

Wage-hour laws have not been amended during this crisis.  Employees must still be paid at least the applicable minimum wage for their work.  Employees must still be paid for overtime at the applicable overtime rate.

And if anyone tells you otherwise, kindly ask them to give you a citation to a law or court case that says so.  Just don’t hold your breath waiting for an answer.

Myth No. 3:  “Employers Need Not Reimburse Employees For Using Their Home Computers And Smartphones While Working From Home During This Crisis”

Depending on the states where an employer has operations, this may not be a myth at all.  But in those states that require employers to reimburse employees for necessary business expenses (California, for example), that obligation still holds during a crisis.

Many employers may have employees working from home for the first time – or have employees in certain job categories doing so for the first time. Even for those employees who sometimes worked from home previously, they may be doing so for much more time now and, arguably, are now incurring greater expenses as a result.

Employers would be wise to review the laws of the states in which they have operations to determine whether they must reimburse employees for expenses incurred while working from home, including home computers, Wi-Fi and smartphones, and to determine how to calculate the amount of reimbursement.

And if employers are paying some non-exempt employees the minimum wage or close to it, they would be wise to consult with counsel to determine if unreimbursed business expenses might lead to an argument that employees are now being paid less than the minimum wage.

Myth No. 4:  “Employers Don’t Have To Pay Employees Working At Home For Responding To Emails And Text Messages After-Hours”

This myth is based, at least in part, on the notion that it’s no skin off employees’ noses to respond to emails and text messages at odd hours because they’re home anyway.  What’s a few minutes here or there?

For many non-exempt employees, not only are they working from home for the first time, but it is also the first time that they have had after-hours access to company emails — or received text messages or calls outside of their typical business hours.

Another way of saying this is that it is the first time that many employers have given some employees such access.  Where an employer previously might have felt comfortable that its non-exempt employees no longer did any work after they punched out at the end of the day, that may no longer be the case.

Emailing, texting or calling a non-exempt employee after hours can create additional compensable time, perhaps even at an overtime rate.  Yes, it is possible that such time could be de minimis and perhaps not compensable.  But it’s also possible that the time could be both significant and entirely compensable, particularly if many non-exempt employees are suddenly spending time responding to emails, texts or calls outside their typical business day.  It’s not too difficult to imagine a wave of class actions alleging that these employees were not paid for all of their time worked.

Employers should give thought to whether this issue could be addressed by implementing policies instructing employees not to email, test or call after hours – or shutting down access to certain systems at the end of non-exempt employees’ scheduled hours.  And they would be wise to consider instructing managerial employees to wait until the start of the next business day before sending after-hours emails and texts if it can be avoided.

Myth No. 5: “Pending Wage-Hour Litigation Has Come To A Standstill During The Crisis”

This myth is based on the belief that, with many courts closed or operating at reduced capacity, pending wage-hour litigation cannot proceed; the cases are dormant.

That isn’t true.

Previously filed wage-hour lawsuits, including class and collective actions, in fact are still proceeding.  Perhaps differently than before, perhaps more slowly, but they are proceeding.

Yes, many hearing dates are being postponed, and perhaps some courts have stayed particular cases.

And, yes, in many cases the parties and their attorneys have agreed to push out depositions and extend deadlines.  But those cases are still very much alive, and thinking otherwise could be very dangerous.  How employers address wage-hour issues during this time could have a great impact on pending litigation challenging their wage-hour practices.

Myth No. 6:  “The Department of Labor Is Closed During The Crisis”

No, it isn’t.  It’s open, and it’s regularly providing information to employers related to COVID-19.  https://www.dol.gov/coronavirus

Myth No. 7:  “If An Employer Can’t Pay Its Employees During The Crisis, It Can Just File For Bankruptcy”

Maybe, maybe not.   A bankruptcy lawyer could address that.

But even if an employer could file for bankruptcy, that doesn’t mean that the owners of the company couldn’t be sued personally for any unpaid wages.  Or executives or even managers.

With summer rapidly approaching and COVID-19 shelter-in-place orders still in effect, many companies face an important and difficult decision of canceling this year’s summer programs, delaying start dates or conducting programs virtually. This ultimately will be a business decision with no one-size-fits-all answer.

A good first step is to assess whether the influx of new summer workers will help or hinder current operations. Are temporary summer interns a boost to productivity or a drag on experienced employees who may be called upon to train and mentor them? Will the employer expect to offer employment to these summer recruits following the internship?

In addition, given the seismic nature of COVID-19 that has indiscriminately shaken businesses in most industries, can an employer’s business afford to bring on temporary summer workers and, if so, does the business have the literal and figurative bandwidth to support these workers, especially if they will be teleworking for at least part of the summer?

Below are five compliance and management issues employers should consider for their upcoming summer programs.

Onboarding

Typically employers have a pre-employment screening process in place for summer interns/analysts/associates, which may include, among other things, screening for illegal drugs and controlled substances; investigating and verifying criminal history; and verifying education and prior employment history. Many steps in the screening process take place in person. However, even where new hires may be asked to commence employment remotely, including an incoming summer class, compliance is still possible.

Since the start of COVID-19 pandemic, the federal government has relaxed many of the regulatory requirements for onboarding new hires. On March 20, the U.S. Department of Homeland Security announced that for the next 60 days or for the duration of the National Emergency (whichever is sooner), employers with staff teleworking due to COVID-19 can obtain and inspect new employees’ identity and employment authorization documents remotely rather in the employee’s physical presence, as long as they provide written documentation of their remote onboarding and teleworking policy for each employee.

Continue Reading The “Tele-Summer Job” Season – 5 Considerations for Employers

For those of you who may have been wondering whether the California Attorney General’s office was still open during the statewide stay-at-home order triggered by the coronavirus, the answer is yes – as evidenced by a statewide misclassification lawsuit filed in San Francisco by the Attorney General, along with the city attorneys for Los Angeles, San Francisco and San Diego.

The lawsuit alleges that ride share companies have unlawfully misclassified drivers as independent contractors under AB 5, the controversial statute that went into effect on January 1, 2020.

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.

Continue Reading California Attorney General’s Misclassification Suit Against Ride Share Companies Sets the Stage for a November Showdown