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There has been a lot of litigation in California concerning the exempt status of various categories of employees, with plaintiffs’ attorneys filing class action after class action seeking to recover four plus years of overtime compensation stemming from employers allegedly misclassifying employees as exempt from overtime compensation.  Typically, these claims are premised on an argument that the employees’ job duties (as opposed to the amount or manner of compensation paid to the employees) do not meet the test for exemption.  A decision hand down today by a California Court of Appeal serves as a reminder that failure to pay exempt employees on a salary basis also destroys exempt status, even if the employees’ job duties satisfy the test for exemption.

In Negri v. Koning & Assoc., the plaintiff was an insurance adjuster who was paid $29 per hour for his work.  He did not have any guaranteed and predetermined minimum salary that he would be paid regardless of hours worked.  In actual practice, the plaintiff always worked at least 40 hours per week and was paid $29 per hour for each of those hours worked (and more if he worked more than 40 hours).  Thus, the employee’s total compensation each week was far more than double the minimum wage (the minimum threshold amount of compensation to qualify for exempt status generally in California).  Nonetheless, the employee sued his employer, claiming he was improperly classified as exempt and was owed overtime compensation.  [He alleged he typically worked over 60 hours per week.]  The employer argued the employee was properly classified as exempt based on his job duties and compensation.  The trial court ruled in favor of the employer, citing federal authorities generally determining that insurance adjusters are exempt administrative employees.  The employee appealed.

The appellate court reversed, but wisely did not want to touch the issue of whether the employee’s job duties met the test for the administrative exemption in California.  [California courts have been all over the map on interpretation and application of the administrative exemption as to claims adjusters and as to many other categories of employees.]  Instead, the court analyzed whether the employee’s compensation met the salary basis test necessary for exempt status.  The court explained that payment on a salary basis requires that an employee be paid a guaranteed predetermined amount (of at least twice the minimum wage) that is not subject to reduction based on quantity or quality of work.  The court held that the employer’s method of paying this employee did not meet this salary basis test because the employee was simply paid hourly without any guaranteed minimum salary.  Thus, hypothetically, if the employee worked only a few hours in a week, his total compensation would be less than double the minimum wage because there was no guaranteed minimum salary in place.  The employer argued that this hypothetical scenario never happened and that the employee always worked and was paid for at least 40 hours and so there was no “actual reduction” based on quantity worked.  As such, the employer argued that the salary basis test was still satisfied as to this employee.  The court disagreed and held that there must be a guaranteed minimum salary in place in order for an employee to be deemed paid on a salary basis and qualify for exempt status.  The court clarified that it is permissible for an employer to pay an employee compensation over and above the guaranteed minimum without destroying exempt status, but there must at least be a guaranteed minimum in place in the first instance.  The full decision is available here.

This case serves as a cautious reminder for employers who pay exempt employees using hourly forms of compensation.  While this is generally permissible, there must be an agreement in place that the employee will receive a guaranteed minimum salary of at least double the minimum wage (California employees) for full-time employment.  Otherwise, exempt status can be successfully challenged, with back overtime owed (typically at an alarming overtime rate given the higher rate of compensation paid to employees classified as exempt).

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California employers should all be aware that California law requires employers to pay out all accrued, but unused, vacation pay immediately upon termination of employment.  In other words, use it or lose it policies and/or policies that provide for forfeiture of vacation on termination of employment are illegal in California.  Employers who fail to timely pay vacation wages on termination of employment are liable not only for the actual amount of unpaid vacation wages, but also for "waiting time penalties" of a full day's regular wages for each day the payment is late, up to 30 days.  There is, however, an exception to the rule prohibiting a forfeiture of vacation wages for unionized employees if the collective bargaining agreement "otherwise provides" (meaning it provides for something other than full payment of all vested vacation upon termination of employment).  Today, a California court interpreted this exception narrowly to hold that a collective bargaining agreement ("CBA") must "clearly and unmistakeably" specify that vested vacation does not need to be paid in order for a waiver to be found.  In other words, an implied waiver or a waiver inferred from the totality of the circumstances (such as the past mutual practice of the union and the employer) is not good enough.  The case is Choate v. Celite Corp. and the decision is here.

In the Choate case, the employer granted its employees between one and five weeks of vacation annually.  At the beginning of each year, the employer calculated the yearly vacation allotment based on an employee's length of service and the number of hours the employee worked the year before.  Under the CBA, employees terminated from employment were entitled to "receive whatever vacation allotment is due them upon separation."  Both the union and the employer understood this provision to mean that employees were entitled to be paid for the vacation time already allotted to them for the year of their termination, but not for any vacation time they had accrued toward the next year's allotment by virtue of having performed a certain number of hours of work.  The employer paid out vacation in accordance with this understanding.  Notwithstanding the apparent agreement of the union and the employer as to the interpretation of the CBA's vacation provision, a group of terminated employees sued for unpaid vacation wages and waiting time penalties. 

The court held that the employer owed the pro rata vacation wages earned during the termination year because the CBA did not "clearly and unmistakeably" waive employees' right to receive those vacation wages.  The court held that it was not sufficient that the union had for years agreed with the employer's interpretation of the vacation provision.  Although the court held that the vacation wages were owed, the court held that the employer did not owe waiting time penalties because the employer's failure to pay was not "willful."  The court held that the employer reasonably believed that the wages were not owed based not only on the union's agreement but also on conflicting case law, some of which suggested that an implied waiver standard was proper. 

As a side note for litigators, the employer in this case also argued that the employees' vacation claim was preempted by the Labor Management Relations Act.  The court rejected this argument and held that the claim was not preempted because the claim did not really require "interpretation" or "analysis" of the CBA.

Employers with unionized employees who do not pay out all accrued, unused vacation on termination of employment should ensure that the applicable CBA clearly and unmistakeably waives this entitlement. 

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Earlier this week, a California court issued a published decision holding that an employer who employs piece rate employees must compensate those employees at the piece rate for all piece rate work and at a rate of at least the minimum wage for each hour of non-piece rate work.  It is not sufficient that an employer simply look backward at the pay period to determine if the total piece rate compensation divided by total hours worked (piece rate time and non-piece rate time) equals at least the minimum wage and then make up the difference only where the total falls below the minimum wage.  The case is Gonzalez v. Downtown LA Motors and the decision is here.

The decision rests on uncertain footing, relying on a prior California Court of Appeal decision in Armenta v. Osmose, 135 Cal.App.4th 314 (2005).  In turn, the Armenta decision relied on a 2002 DLSE opinion letter, in which the DLSE opined that piece workers must be paid at least minimum wage for all non-piece rate hours worked and that the employer may not satisfy this obligation by simply looking back at the end of the pay period at the total piece rate compensation earned and ensuring that it is equal to at least minimum wage for all hours (piece rate and non-piece) worked.   In that opinion letter, however, the DLSE acknowledged that California minimum wage law is susceptible to a divergent interpretation that the backward-looking/averaging approach is permissible.  Some California federal courts have also held that the backward-looking/averaging approach is proper.  To add to the confusion, the DLSE itself flip-flopped on its own interpretation of what is required in this situation.  In an earlier DLSE Interpretive Bulletin, the DLSE endorsed the backward-looking/averaging method.  See DLSE Interpretive Bulletin No. 84-3 (Feb. 1, 1984).  However, without explanation, the DLSE reversed its position several years later, explaining in its Operations and Procedures Manual that piece rate workers, in addition to their piece rate compensation, separately must be paid at least minimum wage for all non-piece rate hours worked. 

Of course, the employer in the Gonzalez case did not get any break from interpreting the law the same way the DLSE has at times interpreted it.  Instead, the employer was found liable to a class of piece rate employees for minimum wage violations and was ordered to pay the class for all unpaid minimum wages, as well as penalties for “willful” violation of the law.  Apparently, it’s only okay for the DLSE to get it wrong when trying to interpret the exact requirements of California wage and hour law. 

Unless and until there is a positive change in legal authority on this issue in California, employers who pay workers on a piece rate basis may want to take a cautious approach and pay these workers not only their piece rate for piece rate work, but also minimum wage for non-piece rate work hours.

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In good news for California employers, over the last two weeks, two more favorable decisions have been issued denying class certification in California wage and hour actions.  Yesterday, in Dailey v. Sears, Roebuck and Co., a California court held that class certification was properly denied in a case alleging certain Sears auto center managers and assistant managers were improperly classified as exempt and denied overtime compensation as well as proper meal and rest breaks.  The court held that substantial evidence supported the trial court’s finding that individual issues predominated over issues common to the class on each claim.  The plaintiff had argued that his theory for class treatment was that Sears uniformly classified the positions as exempt, and had uniform policies and procedures (including strict labor budgets) that effectively required the employees to spend the majority of their time on non-exempt work and to work at least 50 hours per week.  Plaintiff submitted a declaration stating that he spent the majority of his work time on non-exempt work, and submitted declarations of just 4 co-workers stating the same thing.  In contrast, Sears submitted declarations of 21 putative class members, each explaining that they regularly spent the majority of their work time on exempt, managerial tasks. 

The plaintiff argued that his evidence was sufficient to demonstrate that misclassification was widespread and that class certification should have been granted.  Plaintiff argued that individual issues effectively could be managed at trial through the use of representative sampling to determine both liability and damages, whereby a random sample of class members would testify to their work experience and from that testimony liability and damages determinations would be made and extrapolated to the rest of the class.  The court rejected Plaintiff’s arguments.  The court held that the existence of uniform classification policies and other uniform policies and procedures applicable to the class was not enough to support class treatment.  Rather, the proper focus is on the impact of those allegedly uniform policies on the class and how much time class members spent on exempt versus non-exempt tasks.  In this regard, the court determined that substantial evidence supported the trial court’s finding that Sears’ evidence showed that work experiences (and time spent on exempt versus non-exempt work) materially varied from employee to employee depending on a number of factors and that there were no uniform policies “commonly” dictating that the putative class members spend the majority of their time on non-exempt work.  As such, individual issues would predominate over any common issues, making class treatment inappropriate.

The same conclusion was reached with respect to Plaintiff’s meal and rest break claims.  The court held that there was no evidence of a uniform policy or practice depriving class members of meal or rest breaks, making class treatment inappropriate.

Regarding Plaintiff’s proposed sampling plan for managing individual issues, the court expressed its doubt as to whether the use of representative sampling is proper to determine liability (as opposed to damages), based on the United States Supreme Court’s ruling in Wal-Mart v. Dukes.  The court held that even if it is permissible to use sampling to determine liability in some cases, it was not appropriate in this particular case given the predominance of individual issues and lack of common experience among class members. 

In another recently issued decision, Wang v. Chinese Daily News, the Ninth Circuit overturned a judgment following jury and bench trial in favor of a certified class of newspaper employees alleging various wage and hour claims.  The case has quite a procedural history.  First, a California district court granted class certification in favor of the newspaper employees.  Second, the district court granted summary judgment in favor of the class, finding that they did not qualify for exempt status as a matter of law.  Following that order, the district court held a trial on damages that resulted in the class being awarded over $2.5 million in damages.  Chinese Daily News appealed the judgment to the Ninth Circuit, and the Ninth Circuit affirmed.  The Supreme Court granted review and later reversed the Ninth Circuit’s decision in light of Wal-Mart v. Dukes. 

On remand, the Ninth Circuit reversed the district court’s grant of class certification.  In light of Wal-Mart v. Dukes, the court held that class certification could not be maintained under Federal Rule of Civil Procedure 23(b)(2) because the class sought individualized monetary relief, which was not merely “incidental” to their request for injunctive relief.  The Plaintiffs actually conceded that class certification was improper under 23(b)(2).  However, this still left open the question as to whether class certification properly could be maintained under Rule 23(b)(3), which applies when a court determines that common issues predominate over any issues requiring individualized adjudication.  In this regard, the court remanded the issue to the district court to reconsider in light of Wal-Mart v. Dukes and the Ninth Circuit’s decision.  In providing guidance and direction to the district court to consider on remand, the Ninth Circuit emphasized that “commonality” does not exist simply because the claims raise “common questions” about the employer’s compliance with wage and hour laws.  “What matters to class certification is not the raising of common questions—even in droves—but rather the capacity of a classwide proceeding to generate common answers apt to drive the resolution of the litigation.”  The court held that commonality could not be established simply because the employer had a uniform classification policy.  The court further emphasized that “dissimilarities within the proposed class may impede the generation of common answers.”  As a result, the court emphasized that on remand “Plaintiffs must show significant proof that [CDN] operated under a general policy of [violating California labor laws]” in order for class certification to be warranted.

The Wang decision, like the Sears decision, also contains some positive guidance on the impropriety of using sampling at trial in the event a class is again certified on remand.  The court explained its view that the United States Supreme Court has disapproved of “trial by formula” whereby sampling is used to determine damages, which are then extrapolated to the rest of the class without further individualized proceedings.  The court emphasized that “employers are entitled to individualized determinations of each employee’s eligibility for monetary relief” and that “employers are also entitled to litigate any individual affirmative defenses they may have to class members’ claims.” 

This guidance from both a California court and the Ninth Circuit on the impropriety of sampling to determine liability and/or damages is good stuff for California employers defending wage and hour class actions.  Employers should of course be aware that further guidance on this important issue is expected from the California Supreme Court in Duran v. U.S. Bank, which is currently under review.

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This week the California Supreme Court was busy deciding whether to review some notable employment decisions.  In favorable news for employers, the Court denied review in See's Candy Shops v. Superior Court (Silva), the time rounding case in which a California Court of Appeal recently held that time rounding policies are permitted under California law.  Our prior post on the See's Candy case is here.   The Court granted review of Richey v. Autonation, a case addressing whether employers can assert an "honest belief" defense to liability on a claim under the California Family Rights Act.  In the Richey case, the employer had a somewhat ambiguous policy prohibiting employees from engaging in other employment while on CFRA leave.  An employee took a CFRA leave of absence, but while on the leave, engaged in his own self-employment.  The employer believed the employee was abusing his CFRA leave and terminated his employment.  The employee sued, the case was ordered to arbitration pursuant to an arbitration agreement between the parties, and the arbitrator found in favor of the employer on the ground that the honest belief defense provides a complete defense to liability.  The employee appealed, and a California court reversed, which is unusual given the narrow standards for review and reversal of arbitration decisions.  The court of appeal held that the employer could not avoid liability under CFRA based solely on an "honest" belief that the employee was abusing the leave.  The court held that the employer must produce evidence demonstrating that the employee actually was abusing the leave.  The California Supreme Court has now granted review of that decision. 

Finally, the Court this week granted review of Franco v. Arakelian, another case addressing enforceability of employment arbitration agreements in California.  (See our prior post here.)  The Franco court held, contrary to some other California courts, that PAGA claims cannot be compelled to arbitration and that the United States Supreme Court decision in AT&T v. Concepcion does not preempt California law on enforceability of class action waivers in the employment context.  The California Supreme Court has granted review in several similar cases, and this week's grant of review in Franco was on a "grant and hold" basis pending the Court's decision in Iskanian v. CLS Transportation.  Stay tuned for guidance from the California Supreme Court on these important employment law issues.

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Following the California Supreme Court's long-awaited decision in Brinker last year, lower courts were left to resolve the numerous meal and rest break cases that had been held pending Brinker.  As we recently reported, a number of these cases have been favorably decided for California employers, with courts holding that class certification was improper on meal break claims due to the predominance of individual issues bearing on a determination of liability.  We reported on two of these specific cases, In re Lamps Plus Overtime Cases and Hernandez v. Chipotle here and here.  Following their losses, the plaintiffs in each of these cases petitioned for review to the Supreme Court.  Yesterday, the Supreme Court denied review but depublished both cases--suggesting that the Supreme Court did not agree with the court of appeals' analysis in some fashion.  This is unfavorable news for California employers and possibly an indicator that the highest court in this state will continue to view class certifcation standards in wage and hour cases with an employee-friendly eye.

In related  news, the California Supreme Court granted review yesterday of Reyes v. Liberman Broadcasting--another case addressing the enforceability of employment arbitration agreements and issues of FAA preemption (see our post here).  Review was granted on a "grant and hold" basis pending the Court's decision in Iskanian v. CLS (see our related posts here).  It appears the Court will continue to grant review on a grant and hold basis of cases dealing with these same issues until the lead case is decided.

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Yesterday, on the first day of this year’s California Legislative session, Assemblymember Luis Alejo introduced a bill that would significantly raise California’s minimum wage starting in 2014.  If enacted in its current form, the California minimum wage would go to $8.25 in 2014, $8.75 in 2015 and $9.25 in 2016.  Starting in 2017, the minimum wage would be automatically adjusted based on inflation indexes.  For a complete copy of the bill, you can click here.  With the Democrats holding supermajority status in the Assembly and State Senate, we expect many pro-employee bills to be introduced in the coming months.  We will track them for you throughout the Legislative session.

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The Internal Revenue Service has announced the standard mileage reimbursement rate for business travel for 2013.  Effective January 1, 2013, the standard mileage rate will be 56.5 cents per mile (up from 55.5 cents per mile in 2012).   The IRS announcement is here.  Although California employers are not required to reimburse employee travel at the IRS mileage rate, it is advisable to do so because other methods for providing adequate reimbursement are more difficult and burdensome to prove.    

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This week, a California court affirmed a victory for clothing retailer Wet Seal, who successfully defeated class certification on wage and hour claims for alleged failure to reimburse uniform expenses and alleged failure to compensate employees for expenses associated with using their personal vehicles to travel between store locations.  The plaintiff and proposed class of retail employees alleged that Wet Seal required employees to purchase and wear Wet Seal clothing at work, but failed to reimburse employees for the cost of this alleged "uniform."  The employees further alleged that Wet Seal at times required them to use their own cars to travel from one store location to another for meetings or other business reasons, but did not reimburse employees for mileage or other travel expense.  In seeking to have a class of some 12,000 employees certified, the plaintiff submitted declarations of several employees stating that they purchased Wet Seal clothing without being reimbursed and used their car to travel to stores without reimbursement.  In opposing the motion, Wet Seal presented its expense reimbursement and work attire policies, which on their face made very clear that employees are entitled to reimbursement for travel expenses in accordance with law and that employees are not required to purchase Wet Seal clothing but rather simply expected to dress in the fashion style of the store.  Wet Seal also offered employees a generous discount on the cost of store merchandise.  Wet Seal additionally presented declarations of numerous employees confirming that they understood they did not have to buy or wear Wet Seal clothing, and that they had submitted documentation of travel expense and been reimbursed in accordance with company policy.

In concluding that class certification was not appropriate on these claims, the court explained that Wet Seal's policies were facially lawful and thus could not supply the necessary "common policy" or "common method of proof" needed to support a determination of liability on a class wide basis.  Instead, a determination of liability would depend on individualized testimony of employees that, for example, their particular supervisor required them to purchase Wet Seal clothing and/or told them that they could not be reimbursed for travel expenses.  In the circumstances, any trial of liability would require numerous individualized inquiries, making class certification unmanageable and inappropriate.  The case is Morgan v. Wet Seal and the decision is here. 

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California employers with employees in the cities of San Francisco and San Jose should take note of minimum wage increases for these cities taking effect in 2013.  San Francisco passed its minimum wage ordinance a few years ago, but the minimum wage is subject to adjustment each year based on the cost of living.  Effective January 1, 2013, the minimum wage for employees who perform at least two hours of work per week in the City of San Francisco is $10.55 per hour (up from $10.24/hour in 2012).

This week, San Jose voters approved a local minimum wage for the City of San Jose as well.  With the passage of Measure D, the minimum wage for employees working in San Jose will be $10.00 per hour.  The new San Jose minimum wage takes effect 90 days after the election results are certified, which means approximately March 2013.

The state minimum wage otherwise remains at $8.00 per hour.