On October 14, 2017, California Governor Jerry Brown signed Assembly Bill 1701, which will make general contractors liable for their subcontractors’ employees’ unpaid wages if the subcontractor fails to pay wages due.  The new law will go into effect on January 1, 2018.

Specifically, section 218.7 has been added to the Labor Code. Subdivision (a)(1) provides the following:

For contracts entered into on or after January 1, 2018, a direct contractor making or taking a contract in the state for the erection, construction, alteration, or repair of a building, structure, or other private work, shall assume, and is liable for, any debt owed to a wage claimant or third party on the wage claimant’s behalf, incurred by a subcontractor at any tier acting under, by, or for the direct contractor for the wage claimant’s performance of labor included in the subject of the contract between the direct contractor and the owner.

Under section 218.7, the direct contractor’s liability will extend only to any unpaid wage, fringe benefit or other benefit payments or contributions – including interest – but will not extend to penalties or liquidated damages.

Section 218.7 makes clear that nothing in it “shall be construed to impose liability on a direct contractor for anything other than unpaid wages and fringe or other benefit payments or contributions including interest owed.”

Notably, employees will not have standing to enforce section 218.7 on their own. That is, AB 1701 gives the California Labor Commissioner, labor-management cooperation committees, and unions the right to bring an action against the direct contractor, but it does not provide any private right of action to potentially unpaid employees themselves to bring a claim against the direct contractor for unpaid wages.

For labor-management cooperation committees and unions who prevail in an action against a direct contractor for unpaid wages, they will be entitled to their reasonable attorney’s fees and costs, including expert witness fees.

For judgments rendered against direct contractors, their property may be attached to satisfy judgment.

Direct contractors will now be provided the right to request from their subcontractors their employees’ wage statements under Labor Code section 226(a) and payroll records that must be maintained under section 1174.  Such “records must contain information sufficient to apprise the requesting party of the subcontractor’s payment status in making fringe or other benefit payments or contributions to a third party on the employee’s behalf.”

Direct contractors and subcontractors also have the right to request from subcontractors below them “award information that includes the project name, name and address of the subcontractor, contractor with whom the subcontractor is under contract, anticipated start date, duration, and estimated journeymen and apprentice hours, and contact information for its subcontractors on the project.”

Significantly, a direct contractor may withhold as “disputed” all sums owed if a subcontractor fails to timely provide the payroll or project information referenced above, until that information is provided.

The new statute will make it more important than ever for contractors in California to ensure that they are doing business with reputable subcontractors. As part of those efforts, they will want to consider taking steps to ensure that their subcontractor agreements include adequate indemnification provisions and assurances that the subcontractors will comply with wage-hour laws, and perhaps even a term requiring subcontractors to provide periodic statements ensuring compliance with the law.  Of course, there will be a delicate balance to strike to avoid “joint employer” status.

Additionally, the Labor Commissioner, labor-management cooperation committees, and unions may argue that the term “wages” extends to meal and rest period premiums for missed, short, or non-compliant meal and rest periods. Accordingly, contractors in California may want to include specific assurances that subcontractors have compliant meal and rest period policies and practices, in addition to compliant wage and overtime policies and practices.

Because of concerns about employee theft, many employers have implemented practices whereby employees are screened before leaving work to ensure they are not taking merchandise with them.  While these practices are often implemented in retail stores, other employers use them as well when employees have access to items that could be slipped into a bag or a purse.

Over the last several years, the plaintiffs’ bar has brought a great many class actions and collective actions against employers across the country, alleging that hourly employees are entitled to be paid for the time they spend waiting to have their bags inspected when leaving work.  These lawsuits are often referred to as “bag check” cases.

While the Supreme Court’s decision in Integrity Staffing Solutions, Inc. v. Busk largely put an end to these cases under the Fair Labor Standards Act (“FLSA”), it did not do so under California law.  That is because of a critical difference between the FLSA and California law.  Unlike the FLSA, California law requires that employees be paid for all time when they are “subject to the control of the employer” or for all time that they are “suffered or permitted to work.”  And, not surprisingly, plaintiffs’ lawyers in California have argued that employees are “subject to the control of the employer” and “suffered” to work while they wait for and participate in security screenings.

In defending against these claims, not only do employers often argue that each employee’s experience differs such that class certification would be inappropriate, but they frequently argue that the time spent in “bag checks” is so small as to be de minimis – and, therefore, not compensable.

Courts throughout the country have recognized the principle that small increments of time are not compensable, including the United States Supreme Court.

In a class action in the Northern District of California where a class had been certified, Nike argued that the time its employees spent in “bag check” was de minimis.  And the Court agreed, awarding it summary judgment.

In Rodriguez v. Nike Retail Services, Inc., 2017 U.S. Dist. LEXIS 147762 (N.D. Cal. Sept. 12, 2017), the district court certified a class of all Nike non-exempt retail store employees since February 2010.  But in certifying the class, the Court specifically held that, “whether time spent undergoing exit inspections is de minimis is a common issue.  ‘That is, if the time is compensable at all, an across-the-board rule, such as sixty seconds, might wind up being the de minimis threshold.’”

Seizing on that holding, Nike commissioned a time and motion study.  That study revealed that an average inspection takes no more than 18.5 seconds.  Nike argued that such time was de minimis.  The Court agreed.

In reaching its conclusion, the Court found that the average inspection time was minimal, employees did not regularly engage in compensable activities during inspections, and it would have been administratively difficult for Nike to record the exit inspections.

The plaintiffs have already filed an appeal from the order granting summary judgment against them.

We have previously written in this space about the United States Supreme Court’s decision in Integrity Staffing Solutions, Inc. v. Busk, holding that time spent awaiting bag checks was not compensable time under the Fair Labor Standards Act (“FLSA”). But is such time compensable under California law, which differs from the FLSA in some regards? The critical difference between the FLSA and California laws is that California law requires that employees be paid for all time when they are “subject to the control of the employer” or for all time that they are “suffered or permitted to work.” And, not surprisingly, plaintiffs’ lawyers in California have argued that employees are “subject to the control of the employer” and “suffered” to work while they wait for and participate in bag checks or security screenings.

Faced with this issue, the Ninth Circuit Court of Appeals has turned to the California Supreme Court for guidance, as it has done on several other wage hour issues in recent years. The case before the Ninth Circuit is Frlekin v. Apple, Inc., a case about which we have written previously. In Frlekin, the district court entered summary judgment in favor of Apple with regard to the compensability of bag check time. Granting summary judgment to Apple, the Court concluded that the time was not “hours worked” because the searches were peripheral to the employees’ job duties and could be avoided if the employees chose not to bring bags to work.

On appeal, the U.S. Court of Appeals for the Ninth Circuit essentially threw up its hands, concluding that it did not have enough guidance on whether such time would be compensable under California law. Accordingly, it certified to the California Supreme Court the following question:

Is time spent on the employer’s premises waiting for, and undergoing, required exit searches of packages or bags voluntarily brought to work purely for personal convenience by employees compensable as “hours worked” within the meaning of California Industrial Welfare Commission Wage Order No. 7?

In doing so, the Court recognized that California law differs in some respects from federal law on whether such time is compensable. The Court opined that the case seems to fall somewhere between decisions focusing on whether an employee has the ability to avoid the time, which could apply here because the employees have the option of avoiding a search by not bringing a bag to work in the first place, and decisions focusing on the control the employer exerts over the employees, which could apply here because the employees are under the employer’s control in the workplace.

As the Court noted, “[o]nce an employee has crossed the threshold of a work site where valuable goods are stored, an employer’s significant interest in preventing theft arises.” In light of the benefit to the employer in avoiding shrinkage, “[i]t is unclear . . . whether, in the context of on-site time during which an employee’s actions and movements are compelled, the antecedent choice of the employee obviates the compensation requirement.”  The Court suggested that the answer may turn on whether “as a practical matter” employees do not truly have the option of not bringing a bag to work.

Time will tell how the California Supreme Court elects to answer this question. It will likely take at least a year, if not substantially longer, for the Court to issue a ruling. In the meantime, employers in California should review their security practices and consider whether options exist to devise practices that obviate these concerns or at least reduce the associated risk.

Not all new laws go into effect on the first of the year. On July 1, 2017, new minimum wage laws went into effect in several locales in California. Specifically:

  • Emeryville: $15.20/hour for businesses with 56 or more employees; $14/hour for businesses with 55 or fewer employees.
  • City of Los Angeles: $12/hour for employers with 26 or more employees; $10.50 an hour for employers with 25 or fewer employees.
  • Los Angeles County (unincorporated areas only): $12/hour for employers with 26 or more employees; $10.50 an hour for employers with 25 or fewer employees.
  • Malibu: $12/hour for employers with 26 or more employees; $10.50 an hour for employers with 25 or fewer employees.
  • Milpitas: $11 an hour.
  • Pasadena: $12/hour for employers with 26 or more employees; $10.50 an hour for employers with 25 or fewer employees.
  • San Francisco: $14 an hour.
  • San Jose: $12 an hour.
  • San Leandro: $12 an hour.
  • Santa Monica: $12/hour for employers with 26 or more employees; $10.50 an hour for employers with 25 or fewer employees.

Of course, employers with employees in these locales will want to ensure that they are complying with these new minimum wage laws.

Persons who live and work outside of California, including employment attorneys and the most seasoned of human resources personnel, are often confounded when they first learn about California’s Private Attorneys General Act (“PAGA”).  And, for many, the first they learn about PAGA is when a PAGA lawsuit has been filed against their company.

The same series of questions and answers often follow:

A single individual can file a lawsuit against an employer alleging that all employees were subjected to certain violations of the California Labor Code?

Yes.

Even if there are thousands of employees?

Yes.

And the employee doesn’t need to get a class certified to proceed?

Correct, because PAGA claims are considered “representative claims,” not “class claims.” (Although courts are beginning to rule more and more that PAGA claims cannot proceed to trial if they are “unmanageable.”)

And each employee can recover up to $200 per pay period for each Labor Code violation?

Yes.  They can get up to $100 for the first pay period, and $200 for each subsequent pay period.

So, hypothetically, if there were five different violations per pay period, each employee could recover up to $1000 per pay period?

Yes.

But 75% of what employees recover must then be returned to the state?

Generally, yes. It must go to the Labor and Workforce Development Agency (“LWDA”).

Why?

Because it’s part of the statute – 75% goes back to the LWDA.

But a plaintiff must arbitrate PAGA claims if he or she signed an arbitration agreement, right?

Generally, no.

But PAGA claims are covered by class action waivers, right?

To date, the courts have held that they are not covered by class action waivers.

Can PAGA lawsuits be removed to federal court under the Class Action Fairness Act?

Generally, no, because PAGA claims aren’t “class actions” per se.  They’re “representative actions.” However, if PAGA claims are filed as part of a complainat that contains class claims, they could still wind up in federal court if the class claims are removable.

Little by little, the courts have answered these and other PAGA-related questions. But at least one major question has remained – are PAGA plaintiffs entitled to a jury trial?

While the appellate courts have yet to weigh in on this issue, the trial courts are doing so as more and more PAGA cases are being filed and as they approach trial. And, to date, they all appear to conclude that a PAGA plaintiff is not entitled to a jury trial. Several of these decisions are in cases we have handled, and we are not at liberty to discuss them. However, another trial court has recently reached the same conclusion. In Espinosa v. Bodycote Thermal Processing, Inc., Judge John Shepard Wiley concluded that PAGA plaintiffs are not entitled to a jury trial because PAGA claims are equitable in nature.

While Judge Wiley’s conclusion is consistent with the other courts that have reviewed the issue, only time will tell whether the California Courts of Appeal agree when the issue is inevitably presented to them. For now, employers with operations in California should take some comfort in knowing that PAGA claims are likely to be tried to a judge and not to a jury.

Perhaps in response to protests brought by employees and their advocates in recent years, states, counties, and cities across America have been increasing their minimum wage in piecemeal fashion. Few employers are fortunate enough to need worry about only one minimum wage—the federal minimum wage that is the floor below which employers may not go (unless an employer is not covered under the FLSA). Most large employers that operate in multiple states must now navigate a minimum-wage patchwork in which the hourly rate varies from state to state and, sometimes, between counties and cities.

Although the federal minimum wage is $7.25 per hour, 29 states and the District of Columbia have a minimum wage greater than the federal minimum wage. And those states are consistently increasing their minimum wage—New Jersey just passed legislation increasing its minimum wage from $8.38 per hour to $8.44 per hour, effective January 1, 2017, which is also when the Montana minimum wage will go from $8.05 to $8.15 per hour.

California is arguably the most difficult minimum-wage patchwork for employers to navigate. From a present minimum wage of $10 per hour, the California minimum wage will increase one dollar per hour each year until it reaches $15 per hour in 2022. But those increases also result in increasing the minimum salary that must be paid to employees who qualify for most overtime exemptions in California. Because most exempt employees in California must make at least twice the minimum wage on an annual basis, the current minimum salary for exempt employees who work for employers having more than 25 employees will increase from the present minimum of $41,600 per year to a minimum of $62,400 by 2022. (However, if the DOL’s rule goes into effect on December 1, 2016, requiring a new minimum salary of $47,476, then that will be the new floor below which employers may not pay their employees on a salary basis.)

In addition to minimum-wage increases on a statewide level, numerous California cities and counties have passed ordinances increasing their own minimum wages. From San Diego to Berkeley, the minimum wage in many cities has increased quicker than the state minimum wage. California’s minimum wage is presently $10.00 per hour. Employers in Santa Clara and Palo Alto, however, must pay their employees at least $11.00 per hour. Employees across the bay in Oakland must be paid at least $12.25 per hour. San Diego employers must pay their employees $10.50 per hour, as do Santa Monica employers that employ more than 25 employees.

California cities are not the only ones that have increased their minimum wage faster than their resident states. Employers in Albuquerque have had an $8.50 minimum wage since 2013, greater than the $7.50 required under New Mexico law. Similarly, Chicago has a $10.50 minimum wage, although Illinois mandates only $8.25. Seattle businesses that employ less than 500 persons must pay their employees $12.00 per hour, but Washington has a minimum wage of only $9.47.

A version of this article originally appeared in the Take 5 newsletter Five Critical Wage and Hour Issues Impacting Employers.”

As if California employers were not already besieged with wage-hour class actions and agency complaints, the state’s controller has now decided to get in on the action.

As The Los Angeles Times reported last week, Controller John Chiang has initiated a new program he calls “Operation Pay-Up” to recover unpaid wages.  The article may be found here

In short, the Controller is using California’s Unclaimed Property Law to attempt to gain restitution of wages believed to be withheld from employees.  Any recovered wages that are unclaimed will be transferred to the state treasury, with the controller’s office attempting to locate the employees.

At this stage, it is too early to tell how broad “Operation Pay-Up” will be or the companies or industries that it will focus on – let alone how the program will interact with class actions or agency complaints. 

But, at the very least, it is yet another reminder to employers doing business in California that they need to get up to speed on the state’s intricate wage-hour laws and take steps to ensure compliance.

And for those employers who need a primer on California wage-hour laws, EBG’s free wage-hour app puts those laws — and federal laws and the laws of other states – at your fingertips. 

As if traffic in California was not bad enough by itself, employers in the trucking industry have one more thing to worry about – whether they are complying with California’s meal and rest break laws.  In  Dilts v. Penske Logistics, LLC, the plaintiffs represent a class of delivery drivers and installers.  Defendants had hoped to avoid the claim that they had violated California’s meal and rest break laws by arguing that as “motor carriers” the Federal Aviation Administration Authorization Act of 1994 (“FAAAA”) preempts California’s meal and rest break laws.  The trial court agreed and granted the defendants’ motion for summary judgment.  However,  the Ninth Circuit reversed finding that California’s meal and rest break laws are not the type of laws related to prices, routes, or services that Congress intended to preempt.

Defendants argued, among other things, that the requirement that drivers pull over and stop for each break period necessarily dictates that they alter their routes and that finding routes that allow drivers to comply with California’s meal and rest break laws will limit motor carriers to a smaller set of possible routes.  However, the Ninth Circuit was not persuaded.  Thus, motor carriers doing business in California which have relied on the FAAAA preemption, should carefully review their meal and rest break policies and practices to ensure that they comply with California law.

By Michael Kun

Much has already been written about last week’s California Supreme Court decision in Duran v. U.S. Bank Nat’l Ass’n, a greatly anticipated ruling that will have a substantial impact upon wage-hour class actions in California for years to come.  Much more will be written about the decision as attorneys digest it, as parties rely on it in litigation, and as the courts attempt to apply it.

In a lengthy and unanimous opinion, the California Supreme Court affirmed the Court of Appeal’s decision to reverse a $15 million trial award in favor of a class of employees who claimed they had been misclassified as exempt, and to decertify the class.  How the$15 million award had been obtained in the first place has been the subject of much discussion and more than a bit of ridicule.  In short, the trial court had tried the case by essentially pulling names from a hat to determine which class members would be able to testify at trial, with the defendant precluded from presenting evidence as to other employees.  The California Supreme Court described this approach as a “miscarriage of justice.”   It then discussed in great length whether, when and how statistical sampling could be used in these cases, among other things.

Already, both the plaintiffs’ bar and the defense bar are claiming that the Supreme Court’s decision is a victory for them.

Because the Supreme Court did not foreclose the possibility that statistical evidence could be used to establish liability in these types of cases – instead, it recognized that “[s]tatistical sampling may provide an appropriate means of proving liability and damages in some wage and hour class actions” —  the plaintiffs’ bar is claiming victory.  To the extent they contend that Duran allows the use of statistical evidence to prove liability, they are ignoring the most important word in that sentence – “may” – along with the various caveats laid out by the Court.

Because the Supreme Court explained that the process must allow an employer to impeach the statistical model and litigate its affirmative defenses, and that there must be “glue” holding claims together beyond statistical evidence, the defense bar is likewise claiming victory.  But even they must admit that it is not the death blow to wage-hour class actions that they may have hoped for.

In truth, Duran is a unusual decision in that it provides more than a few quotes for plaintiffs’ lawyers and defense lawyers alike to rely on.

Ultimately, the most important language in Duran may be this: “A trial plan that relies on statistical sampling must be developed with expert input and must afford the defendant an opportunity to impeach the model or otherwise show its liability is reduced.”

What does this mean?

It means that some trial plans based on statistical sampling may be approved.

And it means that some trial plans based on statistical sampling may not be approved.

It means that a trial court’s analysis will turn, at least in part, on whether the employer will be able to impeach the model and show that it does not work.

And it means that, more than ever, these cases are going to require the parties to retain expert witnesses, and whether classes will be certified will turn on those expert witnesses.  Remember, the Court did not just say that a trial plan that relies on statistical sampling might be appropriate.  No, it said that such a trial plan “developed with expert input” might be appropriate.

The result of all of this is that, with the plaintiffs’ bar now emboldened because the door has not been shut on the use of statistical evidence on liability, employers may face even more wage-hour class actions in California than before.

And statistical experts can go buy those new houses, cars and boats they’ve been eyeing because their services will be in greater demand than ever.  They are the real victors in this decision.

By Michael Kun

If employers with operations in California believed that they could not possibly face more wage claims than they already do, they can think again.

The California Department of Labor Standards Enforcement (“DLSE”) – the state agency that addresses wage claims – has launched a new website designed to notify employees of their rights and explain how to file claims:

http://www.wagetheftisacrime.com/What-We-Do.html#laborCommissioner

The website provides detailed information about the various types of claims individuals may bring, and how to bring them. As the website explains, all an employee needs to do is fill out a form and mail it to the DLSE.

And the website includes links to those forms — and instructional guides — in English, Spanish, Chinese, Korean, Vietnamese, Tagalog, and Punjabi.

While only time will tell just how many more wage claims are filed as a result of this new website and the publicity surrounding it, one thing remains certain – state and federal agencies are more focused than ever on wage issues. And, as a result, employers must be, too.