Recent Article Reminds Employers of Risks of Wage and Hour Litigation

MSNBC recently published an article that reports on theonslaught of wage and hour litigation being commenced against employers throughout the nation (click here to review the article). This article should serve as a reminder to all employers of the potential risks associated with a failure to comply with wage and hour laws (including, but not limited to, those pertaining to overtime and meal and rest periods), particularly if employees pursue their claims via class action litigation.

Please contact us directly to discuss any questions relating to wage and hour compliance in your workplace.

SB 622 Threatens More Penalties for Employee’s Misclassified as Independent Contractors.

A bill sitting on Governor Schwarzenegger's desk would create even greater penalties for employees misclassified as independent contractors or exempt employees.SB 622, which was sent to Gov. Schwarzenegger's desk on September 20, 2007, would assess large civil penalties against employers who: (1) "willfully" misclassify employees as independent contractors; (2) "willfully" pay a non-exempt employee at a fixed salary;or (3) make certain deductions from the pay of an employee "willfully" misclassified as an independent contractor.

SB 622 would levy large civil penalties of up to $15,000-25,000 against violators.This bill is yet another example of the legislative climate employers now face in California and the importance of making sound and informed determinations when classifying individuals in California as exempt employees or independent contractors.

Update Regarding Assembly Bill 1711

The California Assembly adjourned the 2007 session without voting on Assembly Bill 1711, a bill that proposes sweeping changes to the Labor Code provisions regulatingmeal and rest break requirements imposed on California employers. The Labor Code amendments were proposed by Assembly Member Lloyd Levine on the last day members were permitted to make amendments, and we anticipate that Assembly Member Levine's proposal will be debated and considered when the Legislature reconvenes in January. Given the controversial issues addressed in this Assembly Bill, it is likely that other proposals will also be considered in the next legislative session.

Pending Bill Could Make Major Changes to Meal and Rest Break Flexibility

Last week, California Assembly Member Lloyd Levine proposed broad changes to sections of the California Labor Code regulating, among other rules, the meal and rest break requirements imposed on the state's employers as part of AB 1711. The bill's most important provisions are summarized below.

Meal Break Timing and On Duty Meal Periods

The proposed legislation requires that the meal period shall be completed before the end of the sixth hour of work. The current interpretation is that the meal period must be commenced before the end of the fifth hour, so this bill would provide greater flexibility in the scheduling of meal breaks if enacted.

The bill also contains significant modifications to Labor Code section 512(b), regulating provision of an on-duty meal period. Current regulation leaves employers to guess when an on-duty meal period is permitted, and prudent employers generally guess "very rarely" based on prior opinion letters issued by the Division of Labor Standards Enforcement interpreting the on-duty meal break provisions.

The proposed amendments clarify that on-duty meal periods are permissible when the "nature of the work" prevents an employee from being relieved of all duties, namely when:

  • The employee works alone, or "is the only person in his or her job classification who is on duty and there are no other employees who can reasonably relieve him or her of all duties."

Arguably, this proposed change broadens the category of employees who may take on-duty meal breaks. Note in particular DLSE Opinion Letter 2002-09-04, concluding that a sole, hourly shift supervisor on the graveyard shift at a fast food restaurant must be provided with an unpaid, and potentially offsite meal break, even if the restaurant is left without a supervisor for half an hour. This opinion appears to be contradicted by the proposed legislative changes, assuming that the DLSE is persuaded that there are no other employees who can assume the duties of the supervisor.

  • The work requires a licensed employee, and the employee in question is the only licensed person on duty.
  • State or federal law imposes a requirement that the employee not be relieved of all duties.

Collective Bargaining Agreements

Under the proposed changes, the meal period requirements of Labor Code section 512 will not apply to employees covered by a collective bargaining agreement if the agreement expressly provides for meal periods and provides final and binding arbitration of disputes concerning application of its meal period provisions. This would lead to much greater flexibility for unions and employers to negotiate their own meal and rest period provisions, and would likely be very helpful to unionized employers and their employees.

Broadening of Exemption for Computer Professionals

The proposed changes lower the hourly salary requirement of exempt computer software professionals from $41/hour to $36/hour, allowing for more computer professionals to be paid on an exempt salary basis.

Split Shift Payments

The new regulations simplify the payment of the so-called "split shift" premium available to workers whose schedules are interrupted by non-paid, non-working, non-meal periods, such as restaurant workers who are off between their lunch and dinner shifts. An employee who works a split shift will be entitled to one additional hour of pay at his or her regular rate of pay for each split shift day worked. By way of simple example, a waiter who works the lunch shift, and is off for two hours before returning for the dinner shift, is entitled to an hour of pay beyond the hours worked for this "split shift" time period. This broadens the current law on split shift premiums and requires them to be paid in more situations.

Expert Witness Fees

Currently, prevailing parties in wage and hour claims can be entitled to recover attorneys' fees. The proposed legislation would add expert witness fees as a cost recoverable by the prevailing party, a not insignificant expense.

What the Bill Does Not Do

One of the primary problems with the current meal break regulations is that there is no definition of what it means to "provide" a meal break. Some interpretations claim that "provide" means the employer must force the employee to take the meal break to avoid liability for the extra hour of pay under Labor Code section 512. Other interpretations explain that "providing" a meal break means allowing the employee the opportunity to take the break and that the employee cannot obtain an extra hour of pay under Section 512 simply by failing to take his or her break. The most recent court decision to interpret this provision, White v. Starbucks, used this latter definition holding that: "the employee must show that he was forced to forego his meal breaks as opposed to merely showing that he did not take them regardless of the reason. . . .[Otherwise,] employees would be able to manipulate the process and manufacture claims by skipping breaks or taking breaks of fewer than 30 minutes, entitling them to compensation of one hour of pay for each violation.This cannot have been the intent of the California Legislature, and the court declines to find a rule that would create such perverse and incoherent incentives."

We believe that the Legislature should use this bill as an opportunity to clarify the definition of "provide" and follow the logic of the court in White v. Starbucks. By doing so, the Legislature could help employees by giving them the flexibility to forgo their meal breaks when family or other obligations are more important to them and they would rather get home earlier and take a break shorter than 30 minutes or voluntarily skip their break altogether. This would also help employers because it would help minimize frivolous litigation, where employees simply manipulate the system in order to set their employers up for litigation. Unfortunately, Assembly Member Levine's proposal does nothing to set forth what the employer's exact requirement is with respect to its duty to "provide" a thirty minute meal break for every five hours worked. We encourage readers to contact Assembly Member Levine's office at (916) 319-2040 and ask his office to amend the bill to address this issue.

Conclusion

Assembly Member Levine has proposed broad changes impacting wage and hour law, including the highly controversial meal and rest break regulations. This blog entry provides a brief highlight of the proposals. We will continue to follow the progress of this bill. For additional information on how these changes can impact your business, please contact Carothers DiSante & Freudenberger.

California Supreme Court Limits Availability of Class Action Waivers

On August 30, 2007 the California Supreme Court issued its decision in Gentry v. Superior Court of Los Angeles, in which it significantly reduced the availability of class-action waivers in arbitration agreements for overtime wage litigation. In Gentry, a former customer service manager of Circuit City filed a class action lawsuit against Circuit City, his employer, for overtime wages and unfair business practices. Based upon an arbitration agreement Gentry signed at the beginning of his employment that contained a class-action arbitration waiver, Circuit City compelled Gentry to arbitration to pursue his claims on an individual basis. On review, the appellate court determined the class action waiver contained in the arbitration agreement was valid and that the agreement was not procedurally unconscionable, as it had a 30-day opt out provision.

The California Supreme Court, however, did not necessarily agree.Although the Court did not conclude that all class action arbitration waivers are invalid, its decision requires trial courts to extensively scrutinize such provisions in arbitration agreements with regards to overtime wage litigation.

Specifically, the Court opined that the right of an employee to pursue unpaid wages is an unwaiveable statutory right under the Labor Code and improper class action waivers could have the tendency to create a "de facto waiver" as employees are more likely to pursue such claims in a class rather than on an individual basis. Given the "modest" damages at issue in overtime cases, the expense of litigation, and potential for retaliation by the employer, the Court determined employees may be too intimidated to pursue such claims on an individual basis, even through the DLSE. As such, the Court set forth several factors a trial court must consider when evaluating whether a class action waiver to pursue overtime wages that is contained in an arbitration agreement is valid.

With regards to the issue of whether the arbitration agreement between Gentry and Circuit City was procedurally unconscionable, the Court determined that it was due to the "one-sided" explanation of the benefits of arbitration, as well as a reduction in the statute of limitations to pursue unpaid wages. The agreement had also eliminated the mandatory entitlement to attorney's fees for employees who successfully obtained unpaid wages.As a result of the procedural unconscionability, the Court remanded the case to the trial court for the trial court to review whether the agreement was substantively unconscionable.

For specific questions regarding the applicability of the Gentry decision to your workplace, please contact us directly.

Disabled Employees Must Now Show Ability to Perform Essential Functions of the Job

In a recent 4-3 decision, the California Supreme Court concluded that employees who allege disability discrimination based on California's Fair Employment and Housing Act ("FEHA") must prove that they can perform their essential job functions, with or without accommodation. With this ruling, the Court resolved a split in authority, and aligned FEHA requirements with those of the Americans with Disabilities Act, its federal counterpart.

What Happened

The controversy in Green v. State of California stemmed from a disagreement between the plaintiff and his employer, the Department of Corrections ("DOC"), about whether or not the employee was able to perform the job functions of a stationary engineer. The DOC maintained that the fatigue caused by the employee's ongoing treatment for Hepatitis C rendered him permanently unable to work, and denied his request to return to his position. The employee filed a lawsuit seeking recovery for disability discrimination; both the trial and appellate courts held that FEHA required the DOC to establish that plaintiff was incapable of doing his job. The California Supreme Court, however, disagreed:Plaintiff and all employees who claim disability discrimination in the future bear the burden of proving that they are able to perform the essential functions of their jobs.

What it Means for California Employers

The Supreme Court's ruling is unambiguous. FEHA prohibits employers from drawing distinctions based on physical and mental disability "only if the adverse employment action occurs because of a disability and the disability would not prevent an employee from performing the essential duties of the job, at least not without reasonable accommodation." Therefore, it is now incumbent upon employees to prove that they can perform their jobs. Nonetheless, from a practical point of view, itstill behooves employers to carefully evaluate a disabled employee's ability to perform the job, and carefully review potential reasonable accommodations. In other words, even though employees must demonstrate that they can do the job, employers are well advised to conduct careful, good faith investigation to determine whether a reasonable accommodation can be provided to help minimize a plaintiff's potential for recovery in such cases.

For specific questions concerning compliance, please contact us directly.

Employers’ Profit Sharing Plans Declared Lawful Under California Labor Law

Employers generally recognize that profit-sharing plans can be important tools for motivating employees and improving their morale. Such plans help focus employees on their employers' bottom line and foster a common goal among employers and their employees. In California, however, such plans were also possibly unlawful until the California Supreme Court issued its recent decision in Prachasaisoradej v. Ralphs Grocery Co., Inc. In that ruling, the Court held that an employee bonus plan based on a profit figure that considered store expenses such as the cost of workers' compensation insurance, cash shortages and inventory losses was lawful.

Prior to Prachasaisoradej, two California appellate courts had held that Ralphs' profit-based employee bonus plans that used workers' compensation costs, cash shortages, and merchandise damages to calculate the amount of profits to be shared with the employees in effect off-set a portion of those expenses against their employees' wages. The appellate decisions held that such profit-based employee bonus plans violate California law because the state's Labor Code and wage and hour regulations prohibit employers from deducting such expenses from their employees' wages

In analyzing the issues presented in Prachasaisoradej, the California Supreme Court first recognized that compensation plans that charge a portion of an employer's expenses against an employee's commissions or bonus that was dependent upon that employee's individual efforts are unlawful. In such cases, employers pay less to employees than what they had offered or promised to pay, and as a result, the "employee[s], having performed the labor, actually received or retains less than the paid, offered or promised compensation."

The Court then distinguished those compensation plans from the one utilized by Ralphs, finding that the Ralphs' plan did not involve deductions from the wages offered, promised and paid to the employees, and therefore did not affect the wages paid to Ralphs' employees. Under the Ralphs' bonus plan, "after the store had completed the relevant period of operation, and the resulting profit or loss figure was then derived, that it was possible to determine ...; whether [bonus plan] participants were entitled to a supplementary incentive compensation payment, and if so, how much. This final figure, and this figure only, once calculated, was the amount offered or promised as compensation for labor performed by eligible employees, and it thus represented their supplemental 'wages' or 'earnings.'"

Accordingly, the Ralphs' plan did not involve a deduction of employer's expenses from its employees' individual commissions or bonuses. Rather, it provided supplemental compensation the company used to "encourage and reward certain employees' cooperative and collective contributions to the profitable performance of their stores" by providing them a portion of their store profits that "Ralphs would otherwise be entitled to retain for itself."

Thus, Prachasaisoradej represents a victory for employers both because it held that an important compensation tool is lawful, and because it addressed and attempted to reconcile several of California's complex and sometimes incongruous labor laws. For specific questions regarding the impact Prachasaisoradej may have on your business, please contact us directly.

Appellate Court Emphasizes Narrow Nature of Administrative Exemption

On August 16, 2007, the California Court of Appeal issued Harris v. Superior Court, another in a series of California cases emphasizing the narrow scope of the administrative exemption under California law. In Harris, a class of insurance claims adjusters alleged that they were improperly classified as exempt from California's overtime compensation requirements.The defendant insurance companies contended the adjusters were properly classified as exempt pursuant to the administrative exemption.The Court explored the "administrative/production worker dichotomy."The administrative/production worker dichotomy is a concept which explores the extent to which the employees' performed work generally related to the ongoing operation of the business (administrative), or the day-to-day tasks necessary to operate the employers' business (production work).

While acknowledging the line between exempt administrative and non-exempt production work is not clear, the Harris decision is yet another that narrowly interprets the exemption.In particular, the Court found that exempt administrative work must be carried out at the general operational or policy making level, and that producing the employer's product is not necessarily a condition for doing production work.That is, day-to-day systematic activities necessary for the employer's business operations may well be non-exempt work even if such activities are not producing the employers' product. Employers are advised to carefully evaluate those classified as exempt administrators, as the availability of this exemption continues to narrow.To read a copy of Harris v. Superior Court, click here.

Hear Partner Mark S. Spring Discuss Solutions to the Meal and Rest Break Dilemma Facing California Employers

Mark S. Spring, our firm's Managing Partner, was the featured guest expert for the most recent In the Know Podcast series.In this podcast, Mr. Spring discusses the issues related to the California meal and rest break compliance difficulties and the recent waive of class action lawsuits against California employers related to the meal and rest break regulations.You will hear Mr. Spring discuss the ramifications of several recent court opinions and provide some recommendations that California employers can use to try to minimize the risk of being the next defendant in one of these class actions.To listen/download the podcast click here.

New Federal Regulations Require Employers To Respond To Social Security Administration “No-Match Letters”

For years, the Social Security Administration ("SSA") has been sending "No-Match Letters" to employers who had a significant number of employees whose social security numbers ("SSN") did not match their personal information. The SSA, however, provided unclear guidance for responding to the letters, and little consequence appeared to befall those employers who ignored them.

Last year, the U.S. Immigration Customs Enforcement, a legacy of the disbanded INS, changed all that. It announced the use of no-match letters to target employers in high-profile immigration raids, including the April 2006 raid of IFCO Systems that led to the arrests of thousands of undocumented workers and numerous current and former IFCO Executives. In June 2006, the Department of Homeland Security followed-up the IFCO raids with proposed regulations regarding responding to no-match letters. The final version of those regulations was announced on August 10, 2007 and published on August 15th. In sum, employers who do not comply with the regulations will be considered to have "constructive notice" of the status of those unauthorized workers who were subjects of no-match letters and whose employment eligibility the employer failed to re-verify. Click here to review the regulations in their entirety.

In addition to announcing the final regulations, the Department of Homeland Security also announced that it would increase civil penalties by approximately 25% and expand criminal investigations of those employers who knowingly hire unauthorized workers. Employers therefore now face the potential of significant civil penalties and criminal sanctions for ignoring no-match letters.

What should employers do? Following is a brief summary of the steps employers should take after receiving a no-match letter:

1) Within 30 days of receipt of a "no-match" letter, employers must check their personnel and payroll records to determine if an SSN mismatch was the result of an internal clerical error (such as transposing numbers in a tax form). The employer must then notify the SSA of the clerical error and verify that a corrected SSN matches SSA records.

2) If the employer is unable to find an internal clerical error for a mismatched SSN, the employer must notify the employee about the no-match letter and ask the employee if the employer's records are correct. If the employee claims the records are incorrect, then the employee should provide a corrected SSN, which the employer must verify with the SSA.

3) If the employee claims the employer's information is correct, the employer should direct the employee to resolve the discrepancy directly with SSA. If the employee states that the discrepancy has been resolved, the employer must verify the employee's representation. If, however, the employee is unable resolve the no-match situation within 90 days of the date of the no-match letter, the employer must re-verify the employee's eligibility status within 3 days after expiration of the 90 day period. The re-verification procedure is the same as for new employees except that the employee may not use a document with the disputed social security number and the document used to establish identity must include a photograph. Employers must retain the new I-9 in addition to their prior I-9.

What the regulations do not clarify is how employers should respond to a subsequent SSN no-match for an employee who provides a new SSN in response to a no-match letter, how the SSA will handle the new administrative workload, and how employers should harmonize their anti-discrimination obligations with their heightened immigration compliance responsibilities. Therefore, we advise employers to seek assistance from legal counsel if they have to navigate the intricacies of these new regulations.

For more information on issues affecting California employers go to the California Labor and Employment Law Blog at www.callaborlaw.com.

Editor
Cal Labor Law

Robin E. Largent is a Partner in CDF’s Sacramento office and may be reached at 916.361.0991 or rlargent@cdflaborlaw.com BIO »

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