On July 26, 2018, the California Supreme Court issued its long-awaited opinion in Troester v. Starbucks Corporation, ostensibly clarifying the application of the widely adopted de minimis doctrine to California’s wage-hour laws. But while the Court rejected the application of the de minimis rule under the facts presented to it, the Court did not reject the doctrine outright. Instead, it left many questions unanswered.

And even while it rejected the application of the rule under the facts presented, it did not address a much larger question – whether the highly individualized issues regarding small increments of time allegedly worked “off the clock” could justify certification of a class on those claims.

For more than 70 years, federal courts have regularly applied the de minimis doctrine in certain “circumstances to excuse the payment of wages for small amounts of otherwise compensable time upon a showing that the bits of time are administratively difficult to record.” Those courts have concluded that as much as 15 minutes per day could be considered de minimis and, therefore, noncompensable.

In Troester, the California Supreme Court concluded that most of California’s wage and hour laws have not in fact adopted the de minimis doctrine found in the federal Fair Labor Standards Act (“FLSA”). However, the Court did not go so far as to reject the application in all instances. Indeed, the Court specifically declined to “decide whether there are circumstances where compensable time is so minute or irregular that it is unreasonable to expect the time to be recorded.” (Emphasis added.)

The key words in that sentence appear to be “minute” and “irregular.”

The Court declined to do so “given the wide range of scenarios in which this issue arises,” proffering what appear to be examples where the de minimis rule could apply – e.g., “paperwork involving a minute or less of an employee’s time” or “an employee reading an e-mail notification of a shift change during off-work hours.”

Under the facts presented to it, where the employer allegedly required employees to “work ‘off the clock’ several minutes per shift,” the Court found that the relevant statute and regulations did not permit application of the de minimis rule.

Specifically, it apparently was undisputed that the plaintiff “had various duties related to closing the store after he clocked out, and the parties [had] agree[d] for purposes of [the California Supreme Court] resolving the issue . . . that the time spent on these duties is compensable.” It also apparently was undisputed that these tasks took the plaintiff as few as 4 minutes and as much as 10 minutes each shift that he worked. Given those specific facts, the Court found that the de minimis rule would not be applicable, holding that, under California law generally, an “employer that requires its employees to work minutes off the clock on a regular basis or as a regular feature of the job may not evade the obligation to compensate the employee for that time by invoking the de minimis doctrine.” (Emphasis added.)

Consistent with prior language in the opinion, the key words in that conclusion appear to be “minutes” and “regular.”

In other words, while significant, regular time would not be de minimis, insignificant and irregular time could be.

And how that issue could be addressed on a classwide basis seems questionable, at best, given that the very nature of “off the clock” work is that there are no records of it. Individualized inquiries apparently would need to be conducted person-by-person, day-by-day, to determine if an individual in fact worked “minutes” off-the-clock on a “regular” basis.

Not unimportantly, in addition to the Court’s majority opinion, Justices Mariano-Florentino Cuéllar and Leondra Kruger wrote separate concurring opinions, each offering some additional support for employers.

Justice Cuéllar noted that while the Court’s majority opinion “protects workers from being denied compensation for minutes they regularly spend on work-related tasks,” it “does not consign employers or their workers to measure every last morsel of employees’ time.”

Justice Kruger also offered some examples where she opined that the de minimis rule could apply:

  • An employer requires workers to turn on their computers and log in to an application in order to start their shifts. Ordinarily this process takes employees no more than a minute (and often far less, depending on the employee’s typing speed), but on rare and unpredictable occasions a software glitch delays workers’ log-ins for as long as two to three minutes.
  • An employer ordinarily distributes work schedules and schedule changes during working hours at the place of employment. But occasionally employees are notified of schedule changes by e-mail or text message during their off hours and are expected to read and acknowledge the messages.
  • After their shifts have ended, employees in a retail store sometimes remain in the store for several minutes waiting for transportation. On occasion, a customer will ask a waiting employee a question, not realizing the employee is off duty. The employee – with the employer’s knowledge – spends a minute or two helping the customer.

Justice Kruger wrote that “a requirement that the employer accurately account for every second spent on work tasks may well be impractical and unreasonable” in the situations above.

Following Troester, entities doing business in California will want to review their practices and their timekeeping systems.

And while Troester certainly suggests that employers in California will face an increased number of class actions alleging that certain insignificant amounts of time should have been compensated, plaintiffs’ difficulty in actually getting classes certified on such claims appears relatively unchanged.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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.

As courts continue to address whether and when employers can compel employees to arbitrate their wage-hour claims, the California Court of Appeal has issued a decision in Cortez v. Doty Bros. Equipment Company, No. B275255, ___ Cal. App. 5th ___ (2017), that should be of great help to many California employers with collective bargaining agreements (“CBAs”) that include arbitration provisions.

The United States Supreme Court and multiple California courts have held that a CBA may require arbitration of an employee’s statutory claims only if the CBA includes a “clear and unmistakable” waiver of the right to bring those statutory claims in a judicial forum. What constitutes a “clear and unmistakable” waiver has been a fact-based issue resolved on a case-by-case basis, often in favor of allowing employees to avoid arbitration of their wage-hour claims.

The Cortez Court reached a different, employer-friendly conclusion.

The CBA at issue in Cortez provided that “[a]ny dispute or grievance arising from … Wage Order 16[] shall be processed under and in accordance with” the arbitration procedure outlined in the CBA.  The plaintiff brought claims under not only Wage Order 16, but also under the California Labor Code.  For this reason, the plaintiff argued that the CBA did not apply to his Labor Code claims.  But there was no dispute that the agreement to arbitrate claims “arising under” Wage Order 16 was clear and unmistakable.  For this reason, the Court concluded, it could not “disregard the reality that an employee may enforce the protections of the wage order in court only by bringing a claim under the Labor Code,” and that “[t]o hold that wage and hour disputes arising under Wage Order 16 are arbitrable under the CBA only in theory, but not in practice because they are, by necessity, brought under the Labor Code, would result in the very absurdity courts are required to avoid.”  As a result, the Court concluded that those Labor Code claims that arise under Wage Order 16 must be arbitrated.

However, the Cortez Court did not compel arbitration of those Labor Code claims that did not arise under Wage Order 16 – in this case, claims that concerned the timely payment of all wages due upon termination – because there is no reference to such a requirement in Wage Order 16.  The Cortez Court concluded that the plaintiff’s claim for failure to pay all wages due upon termination “is based on a statute that is not informed by, referenced in, or even relevant to, the wage order disputes they clearly and unmistakably agreed to arbitrate.”

The plaintiff may well seek California Supreme Court review of Cortez.  Whether that happens or not, employers in California negotiating CBAs will want to keep the “clear and unmistakable” standard in mind if they want arbitration to be the sole and exclusive forum for employees to resolve any statutory claims they may have.

Featured on Employment Law This Week – California health care workers can still waive some breaks.

In February 2015, a California appeals court invalidated an order from the Industrial Welfare Commission (IWC) that allowed health care workers to waive certain meal breaks. The court found the order, which allowed the workers to miss one of their two meal periods when working over eight hours, was in direct conflict with the California Labor Code. The state legislature then passed a new law giving the IWC authority to craft exceptions going forward for health care workers. This month, the appeals court concluded that its 2015 decision was based on a misreading of the statute and that even waivers occurring before the new law are valid.

Watch the segment below and see our recent post on this topic.

Kevin SullivanA little more than two years ago, we wrote about how a California Court of Appeal’s decision exposed health care employers to litigation if they relied upon IWC Wage Order 5 for meal period waivers. That decision was Gerard v. Orange Coast Memorial Medical Center (“Gerard I”), where the Court of Appeal concluded that IWC Wage Order 5 was partially invalid to the extent it authorized second meal period waivers on shifts over 12 hours. Much has happened since then.

After Gerard I was published, the Legislature moved quickly to enact SB 327, which amended Labor Code section 516 to state in pertinent part that “the health care employee meal period waiver provisions in Section 11(D) of [IWC] Wage Orders 4 and 5 were valid and enforceable on and after October 1, 2000, and continue to be valid and enforceable. This subdivision is declarative of, and clarifies, existing law.” In enacting SB 327, the Legislature specifically noted “the uncertainty caused by a recent appellate court decision” – Gerard I – and that “without immediate clarification, hospitals will alter scheduling practices.”

After SB 327 was enacted, the California Supreme Court directed the Court of Appeal to vacate its decision in Gerard I and to reconsider the case in light of SB 327. The Court of Appeal has now done so. On March 1, 2017, in an unpublished opinion, the Court of Appeal in Gerard II held that SB 327 is effective retroactively. As a result, the second meal period waivers that the plaintiffs had signed were valid and enforceable. Consequently, the Gerard II Court affirmed the trial court’s order granting summary judgment, denying class certification, and striking class allegations.

The Gerard II decision is a welcome development for California health care employers who have relied upon IWC Wage Order 5 for second meal period waivers, reinforcing the use of such waivers for employees who work more than 12 hours in a shift.

Kevin SullivanOn February 28, 2017, the California Court of Appeal issued its opinion in Vaquero v. Stoneledge Furniture, LLC. The opinion provides guidance to California employers who pay their hourly employees on a commission basis but do not pay separate compensation for time spent during rest periods.

In the case, the employer kept track of hours worked and paid hourly sales associates on a commission basis where, if an employee failed to earn a minimum amount in commissions – comprising of at least $12.01 per hour in commission pay in any pay period – then the employee was paid a “draw” against future advanced commissions. The commission agreement explained: “The amount of the draw will be deducted from future Advanced Commissions, but an employee will always receive at least $12.01 per hour for every hour worked.” In other words, for hourly sales associates whose commissions did not exceed the minimum rate in a given week, the employer clawed back (by deducting from future paychecks) wages advanced to compensate employees for hours worked, including rest periods. The commission agreement did not provide separate compensation for any non-selling time, such as time spent in meetings, on certain types of training, and during rest periods. Although employees clocked out for meal periods, they did not clock out for rest periods.

Two former employees brought suit, alleging, among other things, that the employer did not pay all wages earned during rest periods. The employer filed a motion for summary judgment, arguing that “the rest period claim failed as a matter of law because Stoneledge paid its sales associates a guaranteed minimum for all hours worked, including rest periods.” The trial court granted the employer’s motion, finding that, under the employer’s system, “there was no possibility that the employees’ rest period time would not be captured in the total amount paid each pay period.” The employees appealed.

The California Court of Appeal reversed the trial court’s decision, starting with the premise that the “plain language of Wage Order No. 7 requires employers to count ‘rest period time’ as ‘hours worked for which there shall be no deduction from wages.’” (Italics added by the Court.) The Vaquero Court relied on a 2013 decision in Bluford v. Safeway, Inc., where a sister court had held that this language in Wage Order 7 requires employers to “separately compensate[]” hourly employees for rest periods where the employer uses an “activity based compensation system” that does not directly compensate for rest periods.

Finding that “nothing about commission compensation plans justifies treating commissioned employees differently from other [hourly] employees,” the Vaquero Court agreed with the Bluford Court’s holding that “Wage Order No. 7 requires employers to separately compensate employees for rest periods if an employer’s compensation plan does not already include a minimum hourly wage for such time.” And because the Vaquero employer did not separately compensate its sales associates for rest periods, the Court of Appeal reversed summary judgment.

As had been the case for employers with piece-rate compensation plans, the Vaquero decision makes clear that commission-based compensation plans must separately account for – and pay for rest periods – to comply with California law.