California Supreme Court Holds That Individual Managers Are Not Liable For Unpaid Wages.

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In Reynolds v. Bement 36 Cal.4th 1075 (2005), the California Supreme Court held that corporate managers generally cannot be held personally liable for unpaid wages allegedly owed to the company's employees. (See link to related entry)

The plaintiffs in Reynolds had filed a class action lawsuit against their corporate employer, alleging entitlement to unpaid overtime because they had been misclassified as salaried-exempt managers. In addition, they also named the company's individual officers, directors and shareholders as individual defendants in the lawsuit. To justify keeping these individuals in the action, the plaintiffs had relied on the legal theory, based on caselaw interpreting the federal Fair Labor Standards Act ("FLSA"), that any person who merely "exercises control" over the employment relationship may be deemed to be an "employer."

The Court rejected this expansive definition of "employer" for purposes of California law, however. It held instead that the obligations of the California Labor Code apply solely to individuals or entities who fit the traditional common law definition of an employer. "Under the common law, corporate agents acting within the scope of their agency are not personally liable for the corporate employer's failure to pay its employees' wages." Id. at 1169. Thus, the Court concluded that the individual managers could be held liable. Id.

As a result of this decision, the vast majority of individual managers are now shielded from personal liable for unpaid wage payments under California law. But several caveats still apply. First, an individual may still be held personally liable under federal law if he or she exercises sufficient control over the employment relationship. Second, certain California statutes include penalty provisions that explicitly apply to culpable individual managers in addition to corporate employers. And, finally, an individual may still be subjected to personal liability for wages if the corporate employer is found to be a mere "alter ego" of the individual.

Employment Law Statutes That Apply To A Growing Company

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Many employment law statutes apply only to those businesses that have a certain minimum number of employees. That minimum number can vary widely depending on the statute at issue. Note that there are additional exceptions that may apply to particular businesses, such as those run by religious organizations or private clubs. Some of the primary statutes are as follows:

1+ Employees - The wage and hour provisions of the California Labor Code, the federal Fair Labor Standards Act ("FLSA"), and federal Equal Pay Act generally apply to any business with even one employee.

1+ Employees - The prohibition against sexual harassment contained in the Fair Employment and Housing Act ("FEHA") apply to any business with one or more employees.

1+ Employees - The National Labor Relations Act ("NLRA"), which governs collective bargaining and relationships with unions, applies to any business with one or more employees.

1+ Employees - SB 1661, which takes effect January 1, 2004, provides up to six weeks of paid family temporary disability insurance leave and applies to any business with one or more employees.

2+ Employees - California Health & Safety Code Section 1366.21 ("Cal-COBRA") applies to any business with two or more employees.

5+ Employees - The FEHA's anti-discrimination provisions apply to employers regularly employing 5 or more employees on their payrolls, including part-time employees.

5+ Employees - An employer with 5 or more employees must allow an employee up to six weeks of leave for a normal pregnancy, or up to four months of Pregnancy Disability Leave if the employee is disabled by the pregnancy.

15+ Employees - Title VII of the Civil Rights Act (the federal anti-discrimination law) applies to employers of 15 or more employees who work each work day in a 20 day calendar period for the current or proceeding year.

15+ Employees - The federal Americans with Disabilities Act ("ADA") applies to employers of 15 or more employees for each working day in each of 20 or more calendar weeks for the current or preceding year.

20+ Employees - The federal Age Discrimination in Employment Act ("ADEA") applies to employers with 20 or more employees.

20+ Employees - The federal Consolidated Omnibus Budget Reconciliation Act ("COBRA") applies to employers with 20 or more employees.

50+ Employees - The California Family Rights Act ("CFRA") and the Family and Medical Leave Act ("FMLA") apply to employers of 50 or more persons within a 75-mile radius for each working day of a 20 day calendar period for the current or previous year. Part-time employees and those on paid or unpaid leave are counted when determining whether an employer is subject to this act.

75+ Employees - The California Worker Adjustment Retraining and Notification Act (AB 2957) becomes effective January 1, 2003. It will apply to employers of 75 or more employees, possibly including part-time employees.

100+ Employees - The federal Worker Adjustment Retraining and Notification Act ("WARN") applies to employers who employ either (1) 100 or more employees, excluding part-time employees, or (2) 100 or more employees who combine to work for 4,000 hours per week, exclusive of overtime.

IRS Increases Mileage Rate to 48.5 cents Per Mile

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On September 9, 2005, the IRS announced that it will increase the mileage rate to 48.5 cents a mile for the final four months of 2005. The mileage rate was set at 40.5 cents a mile for the first eight months of 2005, but due to the quickly rising gas prices the IRS took steps to change the rate. The IRS said it will not set the 2006 rate until closer to January and noted that next year's rate could be lower than 48.5 cents. Click here for the IRS announcement.

This is important for California employers because the California Labor Code section 2802 provides:

An employer shall indemnify his or her employee for all necessary expenditures or losses incurred by the employee in direct consequence of the discharge of his or her duties.

Under this section, a California employer must pay an employee for the cost of the use of his or her vehicle within the course and scope of employment. The Division of Labor Standards Enforcement has stated that use of the IRS mileage allowance will satisfy the expenses incurred in use of an employee's car in the absence of evidence to the contrary.

California Follows Federal Law On Partial-Day Absences

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California employers may now deduct partial-day absences from an exempt employee's accrued vacation without fear of rendering the employee non-exempt. Although partial-day deductions have been permitted under federal law for a number of years, California law had been in limbo since a 2002 opinion letter from the Division of Labor Standards Enforcement (DLSE) suggested that such deductions may jeopardize exemptions under the "salary basis" test and expose employers to significant risks of having to pay overtime to exempt workers. Conley v. Pacific Gas & Electric, decided in July 2005, confirms that employers can now make partial-day deductions from vacation or PTO banks and also suggests employers may have more control over when employees can use vacation time than previously thought.

In Conley, a group of exempt PG & E employees filed a class action, disputing PG & E's classification of all exempt PG & E employees. Arguing that PG & E's express and documented policy of deducting partial-day absences from the banked vacation of exempt employees rendered them non-exempt as a matter of law, the employees claimed years of unpaid overtime. The trial court disagreed and refused to certify the class. The Court of Appeal affirmed and found for the employer.

Although the Court agreed that a reduction in actual compensation for partial-day absences would defeat exempt classification, they found no such reduction in Conley. The Court of Appeal distinguished the Conley situation in stating that by deducting from banked vacation, the employer was not reducing compensation, only requiring that employees use accrued vacation when they were actually on vacation.

For employers ready to implement policies related to this new ruling, a bit of advice:

(1) The ruling applies only to accrued vacation or PTO; employers still may not deduct from an exempt employee's pay for partial-day absences. If the employee has exhausted his or her accrued vacation leave, the employer may be required to give an exempt employee additional time off for partial-day absences.

(2) The Conley court defined "partial-day" as "four hours or more in a single day." Making deductions in smaller increments have yet to be tested in the courts.

(3) Finally, employers should probably wait until September 2005 to make sure that the Conley decision is not further appealed to the California Supreme Court before finalizing and implementing any new policies related to partial day deductions.

Labor Commissioner Reduces Employers’ Liability For Meal and Rest Break Violations

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In a recent published decision, the California Labor Commissioner held that payments provided for under Labor Code section 226.7 for missed meal and rest breaks is a penalty and not a wage. This is a favorable ruling for employers in California which settles a long undecided issue over Section 226.7, which provides that employees are entitled to one additional hour of pay at the employee's regular rate of pay for each day the employee does not receive a meal or rest period. By holding that the payment provide for under Section 226.7 is a penalty, the Labor Commissioner shortened the time period for which employees can seek Section 226.7 damages from three years to one year. The Code of Civil Procedure section 338 provides for a three year statute of limitations period for the recovery of wages. However, under the Labor Commissioner's recent holding that Section 226.7 damages are a penalty, employees are limited to a one year statute of limitations period under Code of Civil Procedure section 340. The Labor Commissioner's holding effectively reduces a Plaintiff's damages under Section 226.7 by two-thirds.

The case is Hartwig v. Orchard Commercial, Inc., Case No. 12-569901RB. This case has been made public and is binding on any hearing before a Deputy Labor Commissioner or Hearing Officer. To view the Labor Commisioner's ruling, click here.

Rest Breaks

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Question: I understand that employees can, but are not required to, take rest breaks. How can I keep employees who do not take breaks from later claiming that they were not allowed to take them?

Answer: It is not uncommon for employees who occasionally, or even frequently, fail to take advantage of their optional rest breaks to later sue, claiming that they were not permitted to take those breaks. When this occurs, it can be difficult for an employer to prove that it was the employee's choice not to take the breaks. Employers should consider having employees sign a statement acknowledging their right to take breaks, and instructing the employees what to do if they are not able to take their breaks. Such a statement will make it very difficult for a disgruntled ex-employee to later claim he or she was not permitted to take breaks.

SAMPLE MEMO TO EMPLOYEES REGARDING MEAL/REST BREAKS

All non-exempt employees are required to take an unpaid uninterrupted meal break of at least thirty (30) minutes for every five hours of work. Your regular meal break will be made a part of your schedule by your manager and all non-exempt employees are required to take their meal break as assigned. Failure to take an assigned meal break may be grounds for discipline.

All non-exempt employees are authorized and instructed to take an uninterrupted ten (10) minute rest break if they work more than 3

Do I Have To Pay Severance When I Fire Someone?

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Answer: No. Neither California nor Federal law require an employer to pay severance to an employee upon termination of employment. This is true regardless of the reason for the termination. Nonetheless, some employers choose to pay severance under some circumstances, or have a handbook or other policy that promises severance. If such a practice or policy creates a contractual obligation to provide severance, then the employer will have to do so.

Question: When might it make sense to pay severance?

Answer: If an employer provides an employee anything more than is legally required (generally just the final paycheck and any accrued vacation), the employer should consider requiring the employee to sign a release in exchange. If the employee does not sign a written release, the severance or other benefit given by the employer becomes a mere gift. The employee may take that gift and still sue the employer later for wrongful discharge, discrimination, etc.

Even when the employee is given severance or another benefit, a release will not be appropriate in every case. For example, the use of releases may be counterproductive where the discharge is for misconduct. Such conduct should not be rewarded, and doing so may send the wrong message to remaining employees. However, when faced with such issues as reductions in force or awkward terminations where the situation may not have been handled as well as it might have been, it may be wise to seek a release.

Question: What is a release?

Answer: A release is a document, signed by an employee, in which the employee releases all claims against the employer and promises not to sue the employer. In order for a release to be valid, there must be "consideration." This means that the release is valid only if the employee receives something more than that to which he or she is already entitled, such as an extra week's pay.

Releases are not standard form documents. A release must be carefully tailored to the particular employee and the individual circumstances in which it will be used. For example, if the worker is 40 years old or older, the release will have to comply with the Older Workers Benefit Protection Act (OWBPA), which provides that an employee may not waive any right or claim under the Age Discrimination and Employment Act of 1967 (ADEA) unless the waiver is "knowing and voluntary," and the employee is provided certain specific periods of time to think about the release before signing it, and even to revoke it after signing it.

For these releases, employment law counsel should be consulted to assist in the preparation of any release.

Employers Obligations To Employees Who Are Called Up For Military Service

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The Uniformed Services Employment and Re-employment Rights Act of 1994 (USERRA) protects permanent employees (temporary employees are not covered) who serve in the Uniformed Services. USERRA requires employers to allow five cumulative years of military duty. All employers, regardless of size, are required to adhere to the requirements of USERRA.

While an employer does not have to pay an employee for the time spent on military leave, at an employee's request an employer must allow the employee to use any accrued paid vacation time or similar paid time off towards military service. However, the employer may not require an employee use paid leave time.

An employee on military leave must be treated the same an employee on non-military leave. Therefore, the employee may be required to pay the normal employee contribution for benefits if employees on non-military leaves are also required to do so. The employer is relieved of this duty if the employee provides written notice of his or her intent not to return after military service. Employees who are covered by the employer's group health plan may chose to continue coverage for up to 18 months during military leave, similar to COBRA coverage. These employees may not be charged more than 102 percent of the full premium. However, employees on leave for less than 31 days may not be required to pay more than the normal employee share, if any.

Employees must notify their employer of their intent to return to work after completing military service. If an employee fails to properly report or apply for re-employment, he or she does not automatically forfeit his or her entitlement to the rights and benefits protected by USERRA. Rather, that employee is subject to the rules, policies, and practices of the employer with regard to discipline for absence from work. The employer may also require documentation from the employee upon return to establish that the employee is within the five-year cumulative period, that the employee has followed the requirements for returning, and that the employee was not dishonorably discharged.

If the employee has been absent on military service for 90 days or less, he or she is entitled to be re-employed in the position that he or she would have held in the absence of military service. The employer is required to make reasonable efforts at training the employee if he or she is lacking a qualification for this position. If this fails, the employee is entitled to the position that he or she held when military leave began. The employee is entitled to promotions he or she would have received the military leave had never occurred.

If the employee was on military leave for more than 90 days, the employee is entitled to the position he or she would have held if there had been no interruption due to military service, or a position of similar seniority, status, and pay. If the employee is not qualified to hold that position, the employer must reasonably attempt to train him or her. If the employer is unable to qualify the employee, the employee is entitled to the same position the employee held before military leave began or a position of similar seniority, status, and pay.

Employers are required to make reasonable accommodations to return a person, disabled because of military service, to the position that he or she would have held had he or she not had military leave. If this is impossible, even with a reasonable accommodation, the employer must place the employee is a position with equivalent seniority, status, and pay, for which the employee is qualified or could become qualified after reasonable efforts by the employer. Should both of these be impossible, the employee is entitled to a position of lesser status and pay, but with equal seniority.

Additionally, employers may not fire an employee who has returned from military leave for one year if the employee served for more than 180 days, or for 180 days if the employee served for 30-180 days, unless the employer has good cause.

An employer is not required to re-employ an employee if re-employment is unreasonable or impossible because the employer's circumstances have changed. Additionally, an employer is not required to re-employ employees who have been absent for more than five cumulative years for military service. Finally, an employer is not required to re-employ an employee if doing so would place an undue hardship on the employer. The employer has the burden in establishing each of these defenses.

The military leave laws can be tricky to implement. If you have any questions concerning military leave, it would be best to consult legal counsel.

Time Off For Jury Duty

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As long as you are given reasonable advance notice, employees are entitled to take time off to serve as a juror or as a witness if subpoenaed to appear at trial. You may not discriminate or otherwise punish an employee for taking time off to serve as a juror or a witness.

Question: Am I required to pay an employee who misses work because of jury duty?

Answer: Unless a union agreement or contract provides otherwise, you are not required to pay non-exempt employees for time not worked due to jury service. However, due to the prohibition against discrimination against employees who are subpoenaed or called for jury service, employers should have a jury duty policy that is consistent with other policies for taking time off due to non-personal, non-voluntary reasons. In the case of an exempt employee, the employer must continue to pay the full weekly salary unless the jury service prevents the exempt employee from performing any work for a full week.

Many employers voluntarily pay full or half wages for a specified period of time, such as a maximum of two weeks, to employees who are selected to sit on a jury. They may view it as a civic duty, or an effort to raise the quality of juries by expanding the pool of people who are able to serve. As with all policies, whether you choose to provide paid or unpaid leave, it is important to have a clear policy that is uniformly enforced.

As Long As I Pay My Managers A Salary, I Do Not Have To Worry About Overtime, Right?

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Wrong. Simply paying employees a salary does not make them exempt from overtime obligations. The wage orders issued by the California Department of Industrial Relations provide for limited exemptions from some or all of the state's wage and hour obligations (e.g., overtime, minimum wage, record-keeping, uniform and equipment, cash shortage and breakage, meal-period, and rest period requirements of the wage orders) for "white collar" employees and for employees in particular industries and occupations.

The most common exemptions are those for "white collar" employees (i.e., executive, administrative, and professional employees) and outside salespersons. The wage orders themselves do not define what is meant by "executive," "administrative," and "professional" employees. Rather, they provide a test under which an employee will only be considered exempt under the "executive" or "administrative" categories if he or she is engaged in work (a) that is primarily intellectual, managerial, or creative (i.e., more than 50% of employee's time is devoted to such work); (b) that requires exercise of discretion and independent judgment; and (c) for which the monthly remuneration is not less than twice the minimum wage for one month of full time work. The professional exemption applies only to certain enumerated professions such as doctors, lawyers, engineers, and teachers.

In addition to meeting these requirements for the exemption test, an employee must be "primarily engaged" in exempt work. California generally determines whether an employee is "primarily engaged in" exempt work strictly as whether the employee spends more than one-half of his or her time doing such work. As a result, both the exempt quality of each task which an employee performs and the quantity of time which is spent in such tasks must be carefully appraised in determining if an individual is an exempt "white collar" employee.

Furthermore, the California Division of Labor Standards Enforcement ("DLSE") has taken the position that an employee performing exempt and non-exempt duties simultaneously will be deemed to be performing solely non-exempt duties. For example, if the manager of a small restaurant is supervising employees (an exempt duty) while he or she clears a table (a non-exempt duty), the time will be considered non-exempt for purposes of determining whether the manager is "primarily engaged" in exempt work. Whether the DLSE's position will be upheld by California courts has yet to be seen.

This is a complicated area and employers are counseled to seek advice from their employment counsel regarding application to their specific businesses. Copies of the Wage Orders and other useful information can be found on the Department of Industrial Relations website at www.dir.ca.gov.