Obama to Seek to Narrow Federal Overtime Exemptions

News media are widely reporting that President Obama intends this week to direct the Department of Labor to materially revise the Fair Labor Standards Act (FLSA) regulations pertaining to overtime exemptions so that fewer employees will qualify for an exemption from overtime.  Obama's move relies on his executive authority to revise the rules that carry out the FLSA.  Obama is relying on this executive authority to carry out his pro-worker agenda, as a means of sidestepping the need to pass actual legislation that likely would be blocked by Republicans in Congress.

While the details of the intended revisions have not yet been announced, it is reported that Obama will be urging at least two significant changes:  (1) an increase in the amount of minimum compensation that must be paid to an employee in order for the employee to qualify for exempt status (the minimum currently is $455 per week under the FLSA, and Obama is expected to direct that the minimum be substantially increased, with some urging that it be doubled); and (2) replacing the FLSA "primary duty" test with a more quantitative test that requires an employee to spend a certain percentage of his or her time (likely at least 50%) on exempt duties in order to qualify for exempt status.  These changes would substantially decrease the number of employees who qualify for overtime exemption under the FLSA, and would also likely substantially increase the number of wage and hour lawsuits (already soaring) filed against employers to challenge exempt status and seek unpaid overtime compensation.  Business groups are expected to vigorously oppose the intended overhaul of the regulations.

So what does this mean for California employers?  Probably not much.  California employers are already subject to more narrow overtime exemption laws under California law.  To qualify for exemption in California, an employee (among other things) must be paid a guaranteed salary of at least $640 per week (rising to $800 per week in 2016) and must spend more than 50% of his or her weekly work time on exempt duties.  Thus, the changes being contemplated by the White House are already in effect in California, and the Obama administration appears to be looking to California's laws as guidance in revising the FLSA's overtime exemptions.  This is not good news for employers.

NLRB Continues Reliance on D.R. Horton to Attack Employment Arbitration Agreements

As many predicted, the Fifth Circuit’s recent invalidation of the NLRB’s D.R. Horton decision has not caused the NLRB to revise its enforcement position on the subject of class action waivers in employment arbitration agreements.  The NLRB basically takes the position that, unless overruled by the United States Supreme Court (as opposed to a circuit court of appeal), Board decisions (such as D.R. Horton) remain in effect and are binding on the NLRB’s administrative law judges (“ALJ”).  A decision last week from an ALJ in Leslie’s Poolmart, Inc. and Keith Cunnigham evidences the NLBR’s continued adherence to its D.R. Horton decision and policy.  Indeed, the Leslie’s Poolmart decision actually expands D.R. Horton by holding that an arbitration agreement that was silent on the issue of class and collective claims still violated Section 7 of the NLRA by interfering with employees’ rights to engage in collective, concerted activity for mutual aid and protection.    

In Leslie’s Poolmart, employees were required to sign an arbitration agreement upon hire, whereby they agreed that they would arbitrate any employment-related disputes.  The agreement said nothing about whether an employee could pursue class or representative relief in arbitration.  Notwithstanding his agreement to arbitrate, employee Cunningham filed a class action lawsuit in California state court against Leslie’s, alleging various wage and hour violations.  Leslie’s removed the case to federal court and then filed a motion to compel arbitration of Cunningham’s individual claims and requested that the class claims be dismissed.  The court granted the motion (with the exception of a PAGA claim, which the court held was exempt from individual arbitration). 

Not to be deterred, Cunningham filed a charge with the NLRB alleging that Leslie’s arbitration agreement and efforts to enforce it violated section 7 of the NLRA.  Last week, a NLRB ALJ agreed.  The ALJ held that she was still bound by D.R. Horton regardless of the fact that the Fifth Circuit effectively overruled the decision.  The ALJ further held that D.R. Horton applied even though the arbitration agreement in this case (unlike the one at issue in D.R. Horton) did not expressly preclude arbitration of class or representative claims.  The ALJ reasoned that even though the agreement did not expressly foreclose class claims, it effectively foreclosed such claims because the employer required all employees to sign the agreement and responded to court actions by making motions to compel individual arbitration and to dismiss any class allegations.  Thus, the ALJ found that the agreement interfered with employees’ ability to engage in collective concerted activity.  The ALJ further held that a single employee's filing of a class action claim (even without active participation of any other employee) constituted protected concerted activity.  The ALJ ordered Leslie’s to rescind its arbitration policy and/or to revise it to make clear that employees can pursue class claims either in arbitration or in court.  The ALJ further ordered Leslie’s to file a motion with the district court requesting that it vacate its order compelling Cunningham to arbitrate his individual claims.  The January 17, 2014 Leslie’s Poolmart decision is available in full on the NLRB’s website here.

Unless and until the United States Supreme Court overrules D.R. Horton, it appears, at least for now, that some plaintiffs' class action lawyers may continue using unfair labor practice charges as a last ditch effort to try to avoid dismissal of their class claims.  Given the wide rejection by courts of the NLRB's D.R. Horton decision, the ultimate success of this type of tactic is doubtful. 

Collective Bargaining Agreement May Define When Overtime Pay Is Owed, Along With the Rate

Yesterday a California court issued a favorable decision for employers regarding overtime pay obligations for employees covered by a collective bargaining agreement.  In Vranish v. Exxon Mobil Corp., the plaintiffs, who were unionized production and maintenance workers at Exxon’s Santa Ynez facility, filed a putative class action against Exxon, alleging that Exxon failed to fully pay them overtime compensation required under California law.  Pursuant to the applicable CBA, the plaintiffs regularly worked an alternative workweek schedule of seven 12-hour shifts, followed by a period of seven days off.  Also pursuant to the CBA, the plaintiffs were paid overtime compensation at the rate of one and one-half times their regular rate of pay for hours worked in excess of 40 per week or 12 hours per day.  Overtime was not paid for hours worked between 8 and 12 in a workday.

Plaintiffs sued, alleging that Exxon’s failure to pay them overtime for hours worked between 8 and 12 in a workday was a violation of California’s daily overtime pay requirement set forth in California Labor Code section 510.  The court rejected this argument, holding that the daily overtime provision of section 510 did not apply to plaintiffs because they were covered by a valid CBA and sections 510 and 514 exempt employees covered by a CBA containing its own overtime pay provisions.  Plaintiffs did not dispute that the CBA was valid or that it  provided for payment of overtime compensation in certain circumstances.  However, plaintiffs argued that the CBA’s overtime provision was nonetheless in violation of California law because it did not provide for daily overtime for hours worked between 8 and 12 per day.  According to plaintiffs, the exemption for employees covered by a CBA only applies if the CBA provides for overtime compensation at least at the rates and in the circumstances set forth in section 510.  The court rejected this argument, citing the Division of Labor Standards Enforcement Policy Manual as well as opinion letters wherein the DLSE agreed that the parties to a CBA are free to negotiate and agree on the circumstances under which overtime pay is triggered and the rate at which it will be paid.  As a result, section 510’s specific overtime requirements do not apply to employees covered by a valid CBA that contains its own overtime pay provisions.

The court alternatively held that even if plaintiffs’ interpretation of the CBA exemption was correct, Exxon still would not be liable for overtime compensation because the plaintiffs worked a validly adopted alternative workweek schedule providing for 12-hour shifts and, as such, were not eligible for overtime compensation for hours worked between 8 and 12 in a workday.

The full decision is here.

IRS Announces New Mileage Reimbursement Rate

Yesterday the IRS announced the 2014 optional standard mileage reimbursement rates.  Beginning January 1, 2014, they decrease one-half cent from the current rates in effect, and are as follows:

  • 56 cents per mile for business miles driven;
  • 23.5 cents per mile driven for medical or moving purposes; and
  • 14 cents per mile driven in service of charitable organizations (same as current rate in effect).

Employers using the standard IRS rates for mileage reimbursement purposes should adjust their expense reimbursement policies accordingly.

California Governor Approves Minimum Wage Hike, Domestic Worker Bill of Rights, and Expansion of Paid Family Leave Benefits

This week, California's Governor signed into law legislation (1) increasing the state minimum wage, (2) providing overtime compensation for many household employees, and (3) expanding the scope of California's paid family leave insurance program.   With respect to minimum wage (which is currently $8/hour in California), AB 10 increases the minimum wage to $9/hour effective July 1, 2014, and further increases it to $10/hour effective January 1, 2016.  Currently, the only state with a higher minimum wage than California's upcoming $9/hour is Washington, where the minimum wage is $9.19/hour.

The Governor also signed into law AB 241, which adds section 1450 to the California Labor Code and is known as the Domestic Worker Bill of Rights.  Under this new law, individuals who work in many household occupations are now required to be paid overtime compensation at a rate of one and one-half times their regular rate for all hours worked in excess of 9 hours per day or 45 hours per week.  The law excludes "casual babysitters" whose work is intermittent or irregular as well as babysitters who are under age 18, and further excludes individuals who work in residential care facilities.  The law would apply to nannies, housekeepers, and individuals who provide care for the elderly and/or disabled within a private household.  This new law takes effect January 1, 2014.

Finally, the Governor signed into law SB 770, which expands the scope of California's family temporary disability insurance program.  Under the current program, employees who take time off to care for a seriously ill child, spouse, parent or domestic partner, or for baby bonding, are entitled to partial wage replacement benefits through this state insurance program administered by the EDD.  Under the new law, these benefits are expanded to also be provided to employees who take time off to care for a seriously ill grandparent, grandchild, sibling or parent-in-law.  This new law takes effect July 1, 2014.  To be clear, this new law is not a leave statute and does not require California employers to provide leaves of absence to employees for any of these circumstances, much less to provide employees pay for such leaves.  An employer's leave obligations are governed by the employer's policies and the employer's coverage under other applicable laws such as the FMLA and CFRA.

We will continue to keep you updated on any additional legislative developments.

Prevailing Employer In Wage Case Can Only Recover Attorneys’ Fees If Claim Was Brought In Bad Faith

Employers may recall recent publicity in California over the extent to which an employer may recover its attorneys’ fees after prevailing in a wage and hour action.  This is because Labor Code section 218.5 on its face provides that the prevailing party in any action brought for nonpayment of wages “shall be awarded” its reasonable costs and attorneys’ fees.  Thus, Labor Code section 218.5’s fee-shifting provision on its face applies equally to a prevailing employee and employer.  Based on this language, in Kirby v. Immoos, a trial court awarded attorneys’ fees to an employer who prevailed in a wage case alleging, among other things, meal and rest break violations.  A California court of appeal thereafter affirmed the employer’s fee award.  However, the California Supreme Court ultimately reversed this outcome and held that Labor Code section 218.5 does not apply to meal and rest break claims, reasoning that these claims are not claims alleging “non-payment of wages.”  The Court’s ruling left open the possibility that a prevailing employer could recover attorneys’ fees in certain other types of wage-related actions.

To avoid this result, the California Legislature introduced a bill, SB 462, to amend Labor Code section 218.5 to provide that a prevailing employer may only recover attorneys’ fees if a trial court finds that the employee brought the wage action in bad faith.  The legislature recently passed this bill and yesterday California’s Governor signed it into law.  With this amendment, it will be even more difficult and rare for a prevailing employer to recover attorneys’ fees in wage and hour actions in California.

Only the Named Plaintiff’s Claim in PAGA Action Can Be Considered for Purposes of Diversity Jurisdiction

Today the Ninth Circuit issued its decision in Urbino v. Orkin Services of California, Inc., addressing how to properly analyze whether the amount in controversy element is satisfied for purposes of diversity jurisdiction in a PAGA action.  As most California employers know, PAGA is a California statute that allows an employee to recover penalties (purportedly on behalf of the state) against an employer for various violations of the California Labor Code.  Worse, the employee who is the named plaintiff can seek to recover penalties on behalf of all aggrieved employees.  Most claims are filed in state court, but employers retain the option to remove the action to federal court if the requirements for diversity jurisdiction are met.  One of those requirements is that the amount in controversy must exceed $75,000.  In determining whether the amount in controversy meets this jurisdictional threshold, the question becomes whether courts should look only at the amount of the named plaintiff's claim, or whether courts should look at the aggregate amount of the claim as to all "represented" employees.  California district courts have disagreed over the answer to this question.  Today, the Ninth Circuit resolved the question, holding that only the claim of the named plaintiff (and not the aggregate claims of all aggrieved employees sought to be represented) may be considered in determining whether the amount in controversy requirement is satisfied.  The result of this decision will be that far fewer PAGA claims will be capable of removal to federal court based on diversity jurisdiction.  The full opinion of the court is here

New Class Action Trend: Improper Calculation of Overtime Rates

Two recent class action lawsuits illustrate an emerging trend in wage and hour class action litigation, namely, claims for failure to pay overtime wages based on the improper calculation of the employees’ overtime rates.

The first lawsuit, filed against clothing retailer Forever 21 by a former 13-year employee, alleges that employees were not paid all of their overtime wages due to Forever 21’s failure to take into account non-discretionary bonuses and incentive pay when calculating the employees’ overtime rates.  Juana Diaz, the plaintiff in this lawsuit, seeks to represent all of Forever 21’s hourly warehouse employees in the State of California. This lawsuit was filed May 24, 2013 in the Los Angeles County Superior Court.

In the second lawsuit, plaintiff William Sullivan seeks to represent non-exempt employees of Lyon Management Group, a property management company, in a similar claim.  Sullivan alleges that Lyon failed to include the employees’ commissions and bonuses when calculating their overtime rates.  This lawsuit was filed May 8, 2013 in the Orange County Superior Court.

Although the outcome of these cases remains to be seen, two recent decisions finding such claims suitable for class certification confirm the viability of class certification of claims based on the improper calculation of overtime rates.  In a May 10, 2013 decision in the case of Faulkinbury v. Boyd & Associates, Inc., a California appellate court ruled that the question of whether annual bonuses must be included in calculating the overtime rates of the proposed class was appropriate for class certification.  On May 28, 2013, the federal Court of Appeals for the Ninth Circuit overturned a lower court decision denying class certification in Levya v. Medline Industries, Inc.  The plaintiffs in that action sought to represent over 500 employees on a number of claims, including a claim that nondiscretionary bonuses had been improperly excluded from overtime rates.  The federal court ordered the proposed class certified.

The calculation of an employee’s overtime rate varies from case to case.  Federal and California laws state that an employee’s overtime rate is based on that employee’s “regular rate of pay,” which includes all of the compensation the employee normally receives for the work performed for the employer.  In many cases, it is not enough to look only at the employee’s hourly rate.  The employer must also include any other compensation normally paid to the employee for their work including salary, piecework earnings, non-discretionary bonuses, and commissions in the regular rate of pay.  Conversely, discretionary bonuses, payments in the nature of gifts on special occasions, and contributions by an employer to certain welfare plans generally are not included in the calculation of the “regular rate of pay.”  Whether a particular type of compensation should be included in the regular rate of pay is a very fact-specific determination.  The cases above make clear that employers of all sizes should review their practices to ensure that the regular rate is being properly calculated.  As cases have illustrated, this is an issue that lends to class certification, which greatly increases the risk and exposure of a potential claim.

Duo of Unfavorable Class Certification Decisions Handed Down

Two steps forward, one step back.  That seems to be the pace of wage and hour class certification decisions for California employers these days.  In recent months, both the Ninth Circuit and some California Courts of Appeal have issued employer-friendly decisions holding that class certification is not proper on the facts of the wage and hour claims before them (see, e.g. Wang v. Chinese Daily News (9th Circuit) and Dailey v. Sears Roebuck (California court of appeal).  However, over the past week, two new decisions have been issued reminding California employers that class certification is far from dead in the wage and hour context.

Yesterday, the Ninth Circuit issued its decision in Leyva v. Medlin Industries, Inc., reversing a district court’s denial of class certification and ordering that class certification be granted.  The plaintiff in the case sought to represent a class of 538 hourly employees of Medline, alleging that the employer engaged in improper time rounding practices that resulted in employees performing work “off the clock” and without pay, and that the employer also failed to include bonus compensation in calculating the overtime rate.  The district court denied class certification, holding that individual damage issues predominated over any issues common to the class and that litigating the case on a class basis would be unmanageable.  The Ninth Circuit, without much factual discussion, held that the district court abused its discretion in denying class certification.  More specifically, the Ninth Circuit held that the district court erred in relying almost exclusively on individual damage issues as the basis for denial of class certification.  The Ninth Circuit held that the need for individual damage determinations does not defeat class certification and does not render a class proceeding unmanageable.  In so holding, the Ninth Circuit made clear that it does not believe the United States Supreme Court’s recent decision in Comcast v. Behrend, suggests otherwise.  According to the Ninth Circuit, Comcast v. Behrend simply held that the proponent of class certification must demonstrate a model of proving damages attributable to the theory of liability.   In Comcast, the proposed model did not isolate damages flowing from one theory of liability versus others.  The Ninth Circuit contrasted the case before it and held that if liability was proven for rounding violations and/or improper overtime rate calculations, the damages sought would all flow from the same theory of liability.  Furthermore, the employer had apparently demonstrated that classwide damages could be fairly easily calculated from the employer’s payroll database (the employer had filed a notice of removal early in the case, which included the employer’s own damages calculations).  The Ninth Circuit emphasized that individual damage issues, almost categorically, are not enough to defeat class certification in any wage and hour case.

The Ninth Circuit mentioned but provided no real discussion of facts or evidence in the case proffered by the employer to demonstrate that individual issues predominate.  For example, the employer apparently argued and/or submitted evidence that different employees had different types of bonuses—some being discretionary and some non-discretionary, which might impact whether such compensation even needed to be included in the overtime rate calculation.  Additionally, it is unclear how it could be determined on a classwide basis whether any particular class member actually performed work that was uncompensated (regardless of any rounding practice) without individually questioning each class member.  In any event, the Ninth Circuit’s view on individual damages issues was certainly made clear.  The full decision is here.

In another unfavorable class certification ruling, a California Court of Appeal issued its decision last week in Bluford v. Safeway Stores, also reversing a trial court’s denial of class certification, this time in a meal break case.  On the meal break claim, the employer’s policy apparently did not specifically mention the employee’s entitlement to a second meal break if the employee worked in excess of 10 hours per day.  There was evidence, however, that some employees indeed knew they could take second meal breaks and did take such breaks.  The trial court denied class certification, finding that individual issues predominated because a determination of liability would require questioning of the individual employees as to whether they were permitted to take such breaks and if they did not take them, why that was.  The court of appeal disagreed, holding that class certification could properly be based on the employer’s lack of a proper policy clearly authorizing and permitting second meal breaks for shifts in excess of 10 hours.  In other words, the lack of a fully compliant policy supported class certification, regardless of evidence that at least some employees knew by unwritten policy that they were in fact entitled to such breaks.

There was also a rest break claim at issue in the Bluford case, but it was premised on unique facts different that rest break claims in typical cases (i.e. employees were not permitted to take rest breaks).  Specifically, the rest break claim challenged whether Safeway provided paid rest breaks to its employees.  Safeway paid these employees based on a piece rate formula utilizing mileage rates applied according to number of miles driven, the time when the trips were made and the locations where the trips began and ended.  Pay was also based on fixed rates for certain tasks and hourly rates for other tasks and delays.  According to the court, neither the mileage rate compensation formula nor the fixed rate formula compensated employees for rest period time.  Safeway argued that the mileage and activity rates were designed to include compensation for rest periods.  The court rejected this theory, holding that averaging pay is not allowed under California law as a means for complying with minimum wage obligations.

Notably, the driver employees at issue in the Safeway case were covered by a collective bargaining agreement that had meal and rest break provisions.  The court rejected the argument that the claims were preempted by the Labor Management Relations Act.  The Bluford case is available here.

These two cases serve as an unfortunate reminder that wage and hour class actions remain alive and well in California, and will continue to so remain.  It is imperative that employers ensure that they have compliant wage and hour policies for California employees, as this remains one of the best tools for defeating class certification.  In the meantime, it remains to be seen how other courts (besides the Ninth Circuit) will interpret Comcast v. Behrend and its impact on class certification in wage and hour cases, where damages issues are often highly individualized.

Can Time Spent Simultaneously Performing Exempt and Non-exempt Work Be Counted as Exempt?

In order to be properly classified as an exempt employee in California, the employee must spend the majority of his or her weekly work time performing exempt tasks.  Thus, California's test for exemption has a very quantitative focus, a focus that is materially different than the "primary duty" test under the federal FLSA.  One question that commonly arises in lawsuits challenging exempt status of managers in California is whether time spent by those managers concurrently performing exempt and non-exempt tasks qualifies as exempt work for purposes of the quantitative analysis.  Take, for example, a retail manager who assists customers during a rush but continues oversight of the store and coaching and direction of subordinate employees at the same time.  Is such concurrent work exempt, non-exempt or both?  Yesterday, a California court held that the work cannot be both exempt and non-exempt nor partial time credit given to the exempt and non-exempt sides of the ledger.  Instead, the court held that the trier of fact must determine the "primary purpose" of the work and consider whether that primary purpose falls on the exempt or non-exempt side of the ledger.  The case is Heyen v. Safeway, Inc. and the decision is here

In the Heyen case, the court's analysis led to an adverse decision for the employer.  The plaintiff, a grocery store manager, claimed she spent the majority of her time on non-exempt work (cashiering, etc.) instead of management duties.  Following trial, the court found liability and awarded the plaintiff overtime compensation.  The employer said that the trial court erred in failing to consider time spent by the plaintiff concurrently managing while performing non-exempt tasks.  The appellate court found no erro and held that based on the evidence, the trier of fact properly concluded that the work was for a primarily non-exempt purpose and thus, the employer did not get time credit for the employee's concurrent management duties.

This case serves as a reminder to California employers about the need to carefully review exempt classifications to ensure that exempt employees truly spend the majority of their work time on exempt tasks. 

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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