California Supreme Court Issues Long Awaited Administrative Exemption Decision

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Today the California Supreme Court issued its decision in Harris v. Superior Court (Liberty Mutual Insurance Co.), a case addressing whether insurance claims adjusters qualify for the administrative exemption under California law.  The Court's decision focused solely on the issue of the "administrative/production worker dichotomy" and whether employees who fall on the "production" side can qualify for the administrative exemption.  [By way of background, the administrative/production worker dichotomy is a doctrine whereby the court looks at the employee's duties as compared to the business of the employer.  If the employee's work centers on "producing" the product or service the company chiefly exists to provide, then the employee is a production worker.  Thus, in the insurance context, if the company is solely in the business of adjusting claims, the claims handlers who provide that very service are production workers.]  The lower court held that because the claims adjusters at issue serviced individual claims and did not provide advice on general policies or operations of the company, they were production workers and could not qualify for the administrative exemption as a matter of law. 

Today, the California Supreme Court reversed, holding that the lower court erred in applying the administrative/production worker dichotomy so simplistically and using it to hold that claims adjusters were non-exempt as a matter of law.  The Court did not go so far as to eliminate the administrative/production worker analysis, but made clear that this analysis was not dispositive of whether an employee qualifies for the administrative exemption.  The Court emphasized that this was the error of the lower court.  The lower court relied heavily on an earlier decision, Bell v. Farmer's Insurance Exchange, which had similarly applied the administrative/production worker dichotomy to find that claims adjusters were non-exempt production workers.   The Supreme Court today held that the lower court's reliance on Bell was misplaced, given that the Bell case dealt with an older version of the applicable Wage Order--a version that provided very little guidance on the meaning of an administrative employee, justifying the court in that case in resorting to guidance outside the Wage Order (such as caselaw and opinion letters on the administrative/production worker dichotomy) to interpret the exemption.  In contrast, in this case, the applicable Wage Order (4-2001) contains much more explanation of the administrative exemption and also specifically incorporated several federal regulations interpreting the exemption.  As such, the starting point for analyzing the exemption should simply be the express language of the Wage Order and referenced regulations, and not the judicially created administrative/production worker dichotomy.  Notably, the Court declined to decide whether the claims adjusters at issue actually qualified for the administrative exemption.  However, the Court cited with approval several federal cases finding claims adjusters to be administratively exempt.  The Court noted that an employee's role in "servicing" a company, such as a claims adjuster does, may well be exempt if sufficiently important and the employee's duties involve the regular use of discretion and independent judgment.  The Court suggested that an employee does not have to advise the company on its overall policies or operations in order to meet the test for exemption.  Nonetheless, the Court made clear that its ruling was limited to holding that the lower court erred in finding that the "production" worker analysis barred exempt status as a matter of law.  The Court held that the trial court on remand would have to undertake a factually intensive analysis of the claims adjusters' actual duties (regardless of whether deemed "production" duties) and determine whether they meet the test for exemption as defined in the Wage Order and the regulations incorporated therein.

The Court's decision in Harris is a positive one in that it limits both the application and importance of the administrative/production worker dichotomy--a doctrine that has been used by many courts to find employees did not qualify for the administrative exemption.  However, the Court's decision falls short in providing much specific guidance (and certainly not any bright lines) on how to define or apply the administrative exemption.  It seems clear that determination of exempt status will continue to necessitate an individualized fact-intensive inquiry based on the circumstances involved in any particular case.  The full text of the Harris case is available here. 

Labor Commissioner Publishes Optional Notice for Employer Use to Comply With Wage Theft Protection Act

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Effective January 1, 2012, California employers will have to comply with newly enacted Labor Code section 2810.5(a).  This new law, known as the Wage Theft Protection Act of 2011, requires employers to provide employees with written information at the time of hire concerning wages and related information.  California's Labor Commissioner was tasked with creating a template employers may use to provide the required information.  The Labor Commissioner has just published the optional template, which is available here.  For more information on the requirements of the new law, click here and here.

Court Favorably Resolves Claims for Reporting Time and Split Shift Pay

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This week, a California court summarily adjudicated claims for reporting time pay and split shift pay brought by former employees of AirTouch Cellular.  The employees claimed that AirTouch owed them reporting time pay for having to show up to scheduled meetings that were less than 2 hours long.  The employees also claimed that AirTouch failed to pay them split shift pay on days when they worked split shifts.  The trial court threw out the claims and awarded attorneys' fees to AirTouch under Labor Code section 218.5.  A California appellate court agreed with the trial court's rulings on the reporting time and split shift claims, but reversed the award of attorneys' fees.

As for the reporting time pay claim, the facts were undisputed that on certain occasions the employees were required to attend scheduled meetings that were less than two hours in length, and that was their entire "work" for the day.  The plaintiffs claimed that California's wage orders required AirTouch to pay them for a minimum of two hours as reporting time pay.  The court disagreed, holding that reporting time pay is only required where an employee is furnished with less than half the scheduled day's work.  Because the employees' scheduled day was two hours or less, as long as the employees were furnished and paid for at least half of that time, no additional reporting time pay was owed.

As for the split shift claim, the facts were similarly undisputed that the employees on occasion worked a split shift.  However, the parties disputed whether a split shift premium was owed in the circumstances.  California's wage orders state as follows:  "When an employee works a split shift, one hour's pay at the minimum wage shall be paid in addition to the minimum wage for that workday..."  AirTouch's position was that because the employees' regular wages were well over the minimum wage, they were paid more than the minimum wage for all hours worked plus one additional hour and, as a result, there was no requirement to pay an additional split shift premium.  The court agreed, endorsing the following example: 

"As an example, on November 26, 2005, Krofta worked a total of eight hours.  Because he was making $10.58 per hour at the time, he was paid a total of $84.64 (8 x $10.58).  The minimum wage at the time was $6.75, so a minimum wage worker would be paid wages of $54 (8 x $6.75) plus, pursuant to subdivision 4(C), one additional ―hour‘s pay at the minimum wage, for a total of $60.75 ($54 + $6.75).  AirTouch contended that since subdivision 4(C) by itself required no greater payment for the workday than $60.75, the pay for an employee who earned more than that amount (like Krofta) would not be affected.  We agree that this analysis, which was followed by the trial court, is correct."

The court's analysis of these split shift and reporting time pay issues is favorable for California employers confronting these claims.  Notably, the court also issued a favorable ruling on the validity of another employee's release of claims.  The employe had signed a general release in favor of AirTouch and AirTouch argued that the release barred the employee's claims for reporting time and split shift pay.  The employee argued that Labor Code section 206.5 invalidated the release.  The court disagreed, holding that Labor Code section 206.5 only invalidates a release of wage claims where the entitlement to wages is undisputed.  Because the employee's reporting time and split shift claims were far from conceded by AirTouch, the claims were in dispute and could be included in the scope of an otherwise valid general release.

While the court issued favorable rulings on the foregoing issues, the court also issued an unfavorable ruling on the issue of an employer's ability to recover attorneys' fees for defeating a wage claim.  The trial court had awarded AirTouch its attorneys' fees under Labor Code section 218.5's fee shifting provision.  The appellate court reversed, holding that section 218.5 did not apply and that claims for reporting time pay and split shift pay fall under Labor Code section 1194 (which applies to actions to recover minimum wage and overtime compensation).  Because Labor Code section 1194 has a one-way fee shifting provision (entitling only a prevailing employee to recover fees and not a prevailing employer), the court held that AirTouch was not entitled to recover its fees. 

This author predicts more litigation and court decisions regarding all of these issues addressed by the court in the AirTouch case.  We will continue to keep you posted of such developments.  In the meantime, the Aleman v. AirTouch case is available here. 

Brinker Decision Likely Delayed Until April 2012

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The California Supreme Court is required by court rule to issue decisions ninety days after they are submitted.  The Court previously submitted the Brinker case for decision after the November 8 oral argument, which is why most expected a final ruling by early February 2012.  Eariler this week, the California Supreme Court vacated the November 8 submission of the matter based on its earlier decision to allow further briefing on the issue of whether the eventual decision will operate prospectively or retroactively.  The Court has now ruled that additional briefing will be completed by January 13, 2012 and the matter submitted at that time.  As a result, the Court will now have until April 13 to issue its decision, assuming no additional delays.  We will continue to keep you updated.

Court Allows Post Oral Argument Briefing in Brinker

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In a relatively rare circumstance, the California Supreme Court has allowed the California Employment Law Council to file a post oral argument amicus brief.  The supplemental brief was filed on December 2 and addresses the limited issue of whether the Court's ruling on the "rolling 5 hour" issue will be retroactive or prospective only.  Many who watched the oral argument gleaned that at least some of the Justices surprisingly seemed to be leaning toward a finding that California law requires a meal break to be provided on a rolling basis for every 5 consecutive hours worked.  (This is a different and separate issue than the main issue being decided by the Court--what it means to "provide" a meal break.)  If that is in fact the ruling of the Court, it would mean that an employee who takes an early lunch and then works five more hours would be entitled to another meal break.  Most lawyers, employers, and courts have not interpreted the law in this fashion.  Thus, if the Court rules in this manner and the ruling is retroactive, it is sure to expose California employers to a new onslaught of lawsuits on this meal break issue as well as potentially huge liability.  The California Employment Law Council's amicus brief argues against such a result and suggests that any such ruling should operate prospectively only.   The parties to the case have 30 days (from December 2) to file responsive briefs.  Given the allowance of supplemental briefing, it is unlikely a decision will be rendered in Brinker much earlier than the February deadline. 

Minimum Pay for Exempt Computer Professionals Goes Up January 1

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California's Department of Industrial Relations has announced that the minimum pay required for computer professionals to qualify for overtime exemption in California is increasing effective January 1, 2012.  The increase is 2.5% higher than the current minimum pay rate and requires that these employees be paid at least $38.89 per hour, which translates to a monthly salary of $6,752.19 and an annual salary of $81,026.25.  Employers should note that these minimum pay thresholds are applicable to only to California computer professionals.  The minimum rate of pay under federal law is different (the hourly rate being $27.63 per hour).  Employers with exempt computer professionals in California should review their pay practices to ensure compliance with the increased pay requirements. 

California employers are cautioned that not all employees who work in the computer field qualify for overtime exemption, regardless of how much they are paid.  In order to qualify, these employees (in addition to being paid at least the minimum pay detailed above) must meet very specific duties tests, generally involving programming, software development, as opposed to installation, maintenance, repair, and the like.  (Click here for a more detailed description of these duties on the California Department of Labor Standards Enforcement website.)  The duties tests under California law are, again, somewhat different than those applied under the federal computer professional exemption.  As such, employers with California computer professionals who are or will be classified as exempt, should carefully review the duties and pay to be sure exempt classification is proper.   

San Francisco’s Minimum Wage Goes Up In January 2012

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San Francisco's minimum wage, which currently is $9.92 per hour, is increasing to $10.24 per hour effective January 1, 2012.  This makes San Francisco the first city in the country with a minimum wage in excess of $10 per hour.  The minimum wage increase is tied to a new law passed by San Francisco voters in 2004 which automatically increases the city's minimum wage in accordance with inflation.  Employers with employees who work more than two hours in a workweek inside San Francisco city limits should ensure their payroll practices are updated to reflect the new minimum wage.

Update on This Morning’s Oral Argument in Brinker

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Earlier today, I watched the Brinker v. Superior Court oral argument broadcast live from the California Supreme Court on television.  Unfortunately, I missed about 20% of the arguments because the TV station broadcasting the event, CalChannel, was having technical difficulties.  They have not determined what the technical difficulties were, but if I had to guess I would think that is very possible that a key employee on the broadcast team had his required meal period fall right in the middle of the broadcast and had to leave for 30 minutes.

I think it is a bit crazy to try to predict what the Supreme Court is going to do based on questions and statements made at oral argument.  My ability to predict such things is about as good as my ability to hit a free throw in a crowded gym with the game on the line.  If you have never seen me play basketball, that means somewhere around 55 to 60%.  Therefore, this blog entry will contain no predictions.  However, I can comment on some of the what I saw and the key points that were highlighted:

First, let me address what most believe to be the most important issues in the case:  What does "provide" mean?

A number of the Justices seemed very hostile to the appellant attorney's argument that "provide" means to ensure that meal breaks are taken.  Justices Kennard, Liu, Corrigan and Baxter all appeared perplexed at this argument and challenged the position of the appellant's attorney with aggressive questioning on the issue.  I thought Justice Liu made a very salient point when he quieried:  If the wage orders and statutes are supposed to be intepreted in the manner most favorable to the employee, wouldn't it make the most sense to say that the employee is released of all control during the meal period and the statute is best interpreted to allow the employee complete freedom to do whatever he or she wants to do, including working through his or her meal period if the employee desired?  At least two other Justices seemed to wonder the same thing as Justice Liu based on their follow up questions.  In fact, when the appellant's attorney argued that the employer could still discipline the employee who does not take a meal period after being ordered to do so, at least two of the Justices questioned how this was an interpretation that was favorable to the employee.  One of the Justices also commented that the Court of Appeal decision holding that provide simply means to make available is not in isolation and seemed well supported by at least 9 other federal district court cases.

The other key substantive issue before the Court is the timing requirement of meal breaks.  Is a meal break required for every 5 hour period of work on a rolling basis, or is an employee who works more than 5 hours simply entitled to take a meal break at any time during his or her shift?  On this issue, the Justices who were active with questions seemed most harsh to Brinker's position on timing.  Justice Liu spent a lot of time with Brinker's attorney on this issue.  He seemed particularly adamant that the language in the wage order means that an employee cannot work a five hour period without a meal period and seems to require a rolling 5 hour intepretation.  He offered the example of when an employee works a 9 hour work shift from 9am to 6pm and takes his first meal period at 12 noon for 30 minutes, until 12:30pm.  Liu seemed taken aback when Brinker's attorney argued that a second meal period would not be required in that scenario.  Liu kept harping on the fact that the law says "every 5 hours" and the time period from 12:30 to 6pm was 5 and a half hours.  A number of other Justices who weighed in on this issue, including Chief Justice Cantil-Sakauye, seemed to feel the same way as Justice Liu, although they did not express their feelings as strongly as Liu did.

The third issue that was discussed focused on the viability of class actions for meal and rest break violations.  Unfortunately it was during this portion of the appellant's argument that the audio went out and this issue was not addressed at length by Brinker's attorney.  Thus, there is little I can offer on this particular issue.

The final issue discussed was whether the California Supreme Court's decision would be prospective only or retroactive.  Personally, I cannot understand how the decision would only be prospective.  This decision involves an interpretation of statutory and regulatory language.  Thus, it appears to me that any decision of the California Supreme Court would have to be an interpretation of existing law, which therefore must have retroactive implications.  Brinker's attorney also seemed surprised that this topic was broached by the Justices.

Let me emphasize that it would be foolish for any employer (or employee) to attempt make policy or practice decisions based upon the oral argument or any person's report or views of it (including mine).  This is particularly true here.  The matter is now submitted, which means that the Court is generally required to issue a decision within ninety (90) days.  Have patience for no more than three more months and we will soon have some guidance.  When we do, you can bet that we will report on it right away.

Labor Commissioner to Issue Template for Compliance With New Wage Notification Requirement

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We previously posted on California's passage of the Wage Theft Protection Act of 2011 (AB 469), which requires California employers to start providing written notice to new hires of wage payment information as well as various other categories of information.  Our prior post is here.  California's Labor Commissioner is required to prepare a template for employers to use for this purpose.  The Labor Commissioner has published on its website (here) that this template, along with guidance on compliance, will be available in mid-December.  We will post this information as soon as it becomes available.

California Governor Vetoes Several Bad Employment Bills, But Signs Law Limiting Use of Credit Reports and a Few Others

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In pleasant news for California employers, Governor Brown vetoed several unappealing employment bills this past weekend.  The bills he vetoed include (1) AB 267, which would have invalidated forum selection and choice of law provisions in employment contracts with California employees, (2) AB 325, which would have required California employers to provide bereavement leave, and (3) SB 931, which would have imposed new requirements for use of payroll cards.  That is the good news.

The bad news is that Governor Brown signed into law AB 22, which limits California employers’ ability to use credit reports for employment purposes.  Under the new law, employers (with the exception of certain financial institutions) are prohibited from obtaining or relying on credit reports for applicants and employees, unless the report is sought in relation to (1) a position in the California Department of Justice; (2) a managerial position (defined as a position that qualifies for the executive exemption from overtime); (3) a sworn peace officer or other law enforcement position; (4) a position for which credit information is required by law to be disclosed or obtained; (5) a position that involves regular access (other than in connection with routine solicitation of credit card applications in a retail establishment) to people’s bank or credit card account information, social security number, and date of birth; (6) a position in which the employee would be a named signatory on the employer’s bank or credit card account, authorized to transfer money on behalf of the employer, or authorized to enter into financial contracts on behalf of the employer; (7) a position that involves regular access to cash totaling $10,000 or more of the employer, a customer, or client during the workday; and (8) a position that involves access to confidential or proprietary information (defined as a legal “trade secret” under Civil Code 3426.1(d)).

Even if the employer is permitted to obtain a credit report under one of the exceptions outlined above, the employer must first provide written notice to the applicant or employee, specifying the permissible basis for requesting the report and providing a box for the employee/applicant to check off to request a copy of the report, which must be provided free of charge and at the same time the employer receives its copy of the report.  If employment is denied based on information in a credit report, the employer must advise the applicant/employee and provide the name and address of the credit reporting agency that supplied the report.

Other labor and employment legislation signed into law by the Governor in the last few days includes the following:

SB 459 (Misclassification of Independent Contractors):  This new law creates stiff penalties for willful misclassification of employees as independent contractors.  The law defines “willful” as “voluntarily and knowingly misclassifying” an individual.  The law also makes it unlawful for an employer to charge an individual who has been willfully misclassified any fees or other deductions from compensation if those fees and deductions (e.g. for licenses, space rental, equipment) would have been prohibited had the individual been properly classified as an employee. In the event of a finding of willful misclassification, penalties may be assessed in the range of $5,000 to $25,000 per violation.  Additionally, an employer in violation may be ordered to display prominently on its Internet web site (or other area accessible to employees and the general public) a notice that explains the employer has been found guilty of committing a serious violation of the law by willfully misclassifying employees, along with other prescribed information. The new law also imposes joint and several liability on individuals who, for money or other valuable consideration, knowingly advise an employer to treat an individual as an independent contractor to avoid employee status.  Excepted from liability are employees who provide advice to their employer, and licensed attorneys providing legal advice to the employer.

AB 469 (Notice of Pay Details):  This new law requires employers to provide each employee, at the time of hire, with a notice that specifies (1) the pay rate and the basis, whether hourly, salary, commission or otherwise, as well as any overtime rate, (2) allowances, if any, claimed as part of the minimum wage, including meals or lodging, (3) the regular payday, (4) the name of the employer, including any “doing business as” names used by the employer; (5) the physical address and telephone number of the employer’s main office or principal place of business, and a mailing address if different, and (6) the name, address and telephone number of the employer’s workers’ compensation carrier.  The employer must notify each employee in writing of any changes to the information set forth in the notice within 7 days of the changes, unless such changes are elsewhere reflected on a timely wage statement or other writing required by law to be provided.

AB 887 (Gender Identity and Expression):  This new law amends the Fair Employment and Housing Act (as well as various other laws) to make clear that discrimination on the basis of gender identity and “gender expression” is prohibited.  Gender expression refers to a person’s gender-related appearance and behavior, whether or not stereotypically associated with the person’s assigned sex at birth.  The new law also requires employers to allow an employee to appear or dress consistently with the employee’s gender expression.

AB 1236 (E-Verify):  This new law prohibits the state, or a city or county, from requiring employers to use E-Verify as a means of verifying employees they hire are authorized to work in the United States.

AB 243 (Farm Labor Contractors):  This new law requires employers who are farm labor contractors to disclose to employees the name and address of the legal entity that secured the employer’s services.  This information must be disclosed as part of the employees’ itemized wage statements required by Labor Code section 226.

SB 126 (Agricultural Labor Relations):  This new law deals with petitions objecting to the conduct of an election before the Agricultural Labor Relations Board and specifies that where the ALRB refuses to certify an election because of employer misconduct that, in addition to affecting the results of the election, would render slight the chances of a new election reflecting the free choice of employees, the labor union shall be certified as the exclusive bargaining agent for the bargaining unit.

Unless otherwise specified most new laws take effect January 1, 2012.  California employers will want to familiarize themselves with these new laws as applicable to their workforces and operations, and revise policies and procedures accordingly.