New California Law Requires Written Contract for Commission Pay Arrangements

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Late last week, Governor Brown signed into law AB 1396, which requires commission pay arrangements to be set forth in a written contract.  All employers must comply by January 1, 2013. Under the new law, whenever an employer enters into a contract of employment with an employee for services to be performed in California and the employee’s compensation involves commissions, the contract must be in writing and set forth the method by which the commissions will be computed and paid.  The employer must give a signed copy of the contract to the employee and must retain the employee’s signed receipt of the contract.  In the event the contract by its terms expires but the parties nevertheless continue to work under the expired contract, its terms are presumed to remain in full force and effect until the contract is expressly superseded by a new contract or the employment relationship is terminated.  For purposes of the new law, “commissions” are defined in accordance with Labor Code section 201.4 as compensation paid to any person in connection with the sale of the employer’s property or services and based proportionately upon the amount or value thereof.  However, the new law specifies that “commissions” does not include short-term productivity bonuses nor bonus and profit-sharing plans, unless they are based on the employer’s promise to pay a fixed percentage of sales or profits as compensation for work.

There has been a fair amount of litigation in California over the meaning of “commissions” in cases dealing with the overtime exemption for certain commissioned salespersons.  This new law may well invite more litigation concerning commission pay within the state.  Employers who have employees performing work in California and who are even arguably paid in whole or in part with commissions should be provided a written contract (with an acknowledgement form for the employer to retain) setting forth the formula and timing for earning and payout of commissions.  Failure to comply could subject an employer to an action for penalties of $100 per pay period per aggrieved employee under the Private Attorneys General Act.

Oral Argument in Brinker Scheduled for November

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The California Supreme Court has finally scheduled oral argument in Brinker v. Hohnbaum for November 8, 2011.   Employers can reasonably expect a decision in the case sometime between December 2011 and February 2012, as the Court generally has 90 days following oral argument to issue its decision.  The long-awaited decision is expected to provide much needed clarity on an issue that has fueled countless lawsuits and caused operational headaches for employers as well as inconvenience for employees.  Specifically, the Court will decide whether California meal period laws require employers to ensure that employees take at least a 30 minute, uninterrupted meal break at or before completing five hours of work, or whether employers are simply required to provide their employees the opportunity to take such a break, which the employee may voluntarily decide to skip with no adverse consequence to either the employer or the employee.

Most courts that have decided this issue have held that the law simply requires the employer to provide the opportunity for a meal break, but a few courts (along with the DLSE for a period of time) have held that employers must ensure such breaks are taken, regardless of whether an employee wants to take them.  As a result, employers have had no clear direction on the proper interpretation of the law and most have taken the conservative approach and forced employees to take breaks, even disciplining them for failing to do so, much to the displeasure of many employees.  Employer friendly groups have caused numerous bills to be introduced before the California legislature in the last two or three sessions to try to clarify this issue in a way that is operationally manageable and beneficial to employers and employees alike, but the legislature has refused to pass almost any bill that would provide the greatly needed relief--much to the appreciation of the California plaintiffs' bar which has profited wildly from the cottage industry of meal break litigation.

Stay tuned for further developments on this important case for California employers.

IRS Introduces Partial Amnesty Program for Independent Contractor Misclassification

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On September 21, 2011 the Internal Revenue Service introduced the Voluntary Worker Classification Settlement Program that offers employers the opportunity to gain certainty regarding potential past federal tax liability associated with misclassifying workers as independent contractors.  The Program allows employers to voluntarily reclassify workers that were improperly classified as independent contractors into employees and pay a minimal payment (federal payroll taxes, interest and penalties) to cover past federal payroll tax obligations for the contractor-turned-employee.  A link to the IRS announcement with more details about the Program is here.

To be eligible for the Program, an employer must:

(1) Consistently have treated the workers in the past as nonemployees,
(2) Have filed all required Forms 1099 for the workers for the previous three years, and
(3) Not currently be under audit by the IRS, the Department of Labor or a state agency concerning the classification of these workers.

With the federal and state authorities increasing their enforcement in this area, the primary benefit of this Program is that it allows employers that believe they may have missclassified workers as independent contractors to be assured, by paying the minimal amount to the IRS (10% of the back payroll taxes owed), that they will have not have any further past federal tax liability.

There are, however, significant risks with using this Program.  This program is not a complete amnesty program.  There are many areas where an employer can be liable when it misclassifies employees as independent contractors other than federal payroll taxes.  This Program only provides relief for federal payroll taxes.  Participation in this Program would still leave the employer with potential liability to state taxing agencies, the employer's workers' compensation carrier, and directly to the misclassified worker.  In fact, using this Program and then reclassifying the workers as independent contractors may alert the state agencies to the possibility of liability for unpaid state payroll taxes and unemployment contributions.  If your workers' compensation carrier becomes aware of the misclassification it can seek payment for past unpaid workers' compensation insurance premiums under the theory that the workers should have been on the payroll used to calculate the amount of the premiums.  The reclassification of the workers may also alert them to potential recovery on a variety of issues, including but not limited to unpaid overtime, missed meal and rest breaks and unpaid employee benefits that they did not receive during the time period they were misclassified (such as retirement/pension benefits, stock options, health insurance, and vacation).  Moreover, using this Program may be seen as an admission that, in fact, the workers were not independent contractors, thereby making it easier for the state agencies and individual employees to pursue these potential damages.  Finally, the Program includes a provision whereby the employer is subject to future payroll tax audits from the IRS for a six year period as opposed to the normal three year statute of limitations.

Although the Voluntary Worker Classification Settlement Program offers certainty regarding past federal taxes, use of the Program could lead to other issues.  We recommend that employers think carefully about the risks to their workforce before using this Program and consult with competent attorneys and/or tax advisors before doing so.

California Supreme Court to Hear Overtime Exemption Case Next Week

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Almost four years ago, the California Supreme Court granted review of Harris v. Superior Court, 154 Cal.App.4th 164 (2007), an important case involving application of the administrative exemption under California law. The Court has finally scheduled oral argument on the case for October 3, 2011.

The issue under review in Harris is whether certain insurance claims adjusters were properly classified by their employer as exempt under the administrative exemption.  Specifically, the Court will analyze whether the claims adjusters were engaged in work that was “directly related to management policies or general business operations,” commonly referred to as the administrative/production dichotomy, and whether this analysis is dispositive of the issue regarding whether an employee is properly classified under the administrative exemption.

This decision in this case is likely to offer some important guidelines in determining how to properly analyze whether employees qualify for the administrative exemption under California law. For a more detailed description of the Court of Appeal ruling and case background, click here.  We expect a decision in December or January 2012.

Another Court Says Meal Breaks Must Be ‘Available’ Not ‘Ensured’

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In a Santa Clara County Superior Court Statement of Decision that employers can hope will be echoed by an appellate court, the Honorable James P. Kleinberg ruled following a bench trial that an employer complies with California's meal break requirement if it makes a 30-minute break "available" rather than "ensure" that the break is taken.

The case is Driscoll v. Graniterock. The Graniterock plaintiffs were concrete ready-mix drivers. The drivers do not have a regular schedule and until they arrive at work to get the concrete trucks, they do not know how long the day will last or whether they will have to work through lunch. The on-duty nature of the work is dictated by the physical properties of concrete, a perishable product that, once pouring has commenced, must be poured continuously until complete. Drivers could, however, tell the dispatcher that they wanted a meal break. Drivers were paid a premium for taking an on-duty meal break, and not surprisingly, expressed a strong preference for eating on the job, earning additional pay, and leaving early.

Graniterock drivers signed a revocable on-duty meal period agreement that included the caveat that the written revocation provide a one day advance notice of the decision to revoke. Judge Kleinberg rejected Plaintiffs' argument that the one day notice was facially invalid, finding it significant that the one day notice requirement did not deter a driver from revoking the agreement -- indeed three drivers did revoke. The more common scenario showed that dispatchers made every effort to accommodate a driver's desire for a break, even when the driver did not revoke the agreement but simply called to say he wanted lunch.

Most importantly, while noting that the issue of whether an employer must "ensure" or merely "make meal breaks available" remains to be decided by the California Supreme Court, the court sided with the majority of appellate cases currently pending resolution of Brinker, and concluded that the Wage Order's use of "provide" means "to make available." Graniterock argued, apparently quite persuasively that since its drivers knew that the meal break waivers were neither required nor irrevocable, and that they could simply request and receive a meal break, it was the drivers themselves who chose to waive their right to an off-duty meal break.

While employers can applaud the trial court's ruling, a note of caution sounds in the decision's procedural background: this bench trial was tried for more than two weeks and required 55 witnesses and 285 exhibits, an expensive undertaking for the company, albeit one with the comfort of an excellent outcome.

Court Says Law Clerk Exempt from Overtime Pay

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A California court ruled this week that a law school graduate who had not yet passed the bar was a "learned professional" and thereby exempt from overtime compensation and similar benefits afforded only non-exempt employees. The plaintiff in the case began working for a law firm after graduating law school and while awaiting bar exam results and admission to the bar. During this time period, the law firm classified the plaintiff as an exempt professional employee and paid him a set salary. As an exempt employee, plaintiff was not paid overtime. The plaintiff later sued for unpaid overtime compensation, claiming the firm had misclassified him as an exempt employee. The firm moved for summary judgment, arguing plaintiff had been properly classified and was not entitled to overtime compensation. The trial court judge agreed and threw out the case. Plaintiff appealed.

The appellate court agreed with the trial court that the plaintiff's claims had no merit. Plaintiff argued that California's professional exemption only applies to licensed attorneys (who have passed the bar and been admitted to practice) and cannot be applied to law school graduates prior to bar admission. The court flatly rejected this argument, holding that California'sprofessional exemption applies not only to certain licensed professionals, but also to "learned professionals" who do not necessarily need to be licensed to qualify. The court held that the plaintiff's job duties (equivalent to those of a first year attorney) along with his salary clearly qualified him for exemption as a learned professional. The court's decision was limited to the facts at hand, which involved a law school graduate who was awaiting bar admission. The court did not address applicability of the learned professional exemption to law school students who work at law firms during summer breaks.

The case is Zelasko-Barrett v. Brayton-Purcell LLP and the decision is here.

Is Sabbatical a Form of Vested Vacation Benefits?

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Employers who offer paid sabbaticals to their long-term employees probably should not be sued, but apparently they are not immune. In Paton v. Advanced Micro Devices, Inc., the plaintiff resigned his employment with AMD and then brought a class action against AMD alleging that the company failed to pay out earned but unused sabbatical pay. According to the plaintiff, the sabbatical pay was just another form of accrued vacation that was required to be paid out on termination of employment.The trial court threw out the claim, finding that AMD's sabbatical program was not the equivalent of vested vacation and that sabbatical pay did not have to be paid out on termination of employment. The plaintiff appealed.

On appeal, the court held that there was insufficient evidence before the court to find that AMD's time off program was a true sabbatical program and not vacation. The court discussed the differences between vacation and sabbaticals, explaining that vacation is not conditioned upon anything other than the employee's rendering of service and vacation does not impose conditions on how the employee uses the time away from work. Sabbaticals, on the other hand, tend to be purpose-driven and aimed at providing the employee with incentive for professional growth and continued employment. However, the court recognized that many private companies are providing sabbatical leaves that provide for an extended amount of time off (longer than any typical vacation) but are not necessarily tied to any special learning opportunity. The court indicated that this type of sabbatical program is harder to distinguish from a vacation program. Nonetheless the court laid out several factors to be considered in assessing whether a leave program is a sabbatical: (1) the leave must be granted infrequently, e.g. every seven years; (2) the leave time is longer than a typical vacation; (3) the leave must be granted in addition to regular vacation that is comparable to that offeredcomparable employees in the regular market; and (4) the leave program should specify that the employee is expected to return to work for the employer after the sabbatical is over.

Analyzing the specific sabbatical program before it, the court held that there was insufficient evidence to support a finding that the leave qualified as a sabbatical as a matter of law. AMD's policy originally provided for an 8-week sabbatical leave after seven years of employment, but was later changed to provide for a 4-week sabbatical after five years of service. The policy provided for continued accrual of vacation during the sabbatical leave and for return to work upon conclusion of the leave. The policy's express purpose was to encourage continued employment by providing time away for revitalization and enrichment. The court found that the length of the sabbatical leave and frequency upon which it could be taken were areas that reasonable minds could differ as to whether the leave was qualitatively different than traditional vacation leave. Furthermore, the court did not have evidence as to AMD's motivation in adopting the policy or how AMD's vacation policy compared to that of competitors. As such, the court remanded the case to the trial court.

Employers with sabbatical programs should carefully review these programs to ensure that they are adeqately distinguished from traditional vacation to avoid costly claims for unpaid "vacation" pay on termination of employment.

Attorneys’ Fees Properly Awarded to Prevailing Employer in Wage Case

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In Kirby v. Immoos Fire, a California court held that attorneys' fees were properly awarded to an employer who prevailed in a putative class action alleging missed rest breaks. The court relied on the bilateral fee-shifting provision of Labor Code section 218.5, which provides that the prevailing party in an action alleging violations of certain provisions of the Labor Code is entitled to recover its attorneys' fees. Section 218.5's fee-shifting provision excludes actions alleging claims for unpaid minimum wages or overtime wages covered by Labor Code section 1194 (which has a unilateral fee shifting provision allowing only a prevailing plaintiff to recover attorneys' fees). In this case, the plaintiff alleged (among other things) a claim for unpaid overtime wages, as well as a claim for missed rest periods. The court held that the employer could not recover its fees incurred in defending the overtime claim, but could recover its fees incurred in defending the rest period claim.
This case presents a positive development for employers by providing precedent for an award of attorneys' fees in actions alleging meal and rest period violations should the employer prevail.

San Francisco Wage Ordinance Amendments Being Considered

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In the recent California Supreme Court decision in Sullivan v. Oracle, the Court held that non-California employees who perform work in California are subject to California's wage and hour regulations. Let's not forget that such "home turf" rules already existed in San Francisco, where its wage and hour and paid sick leave laws often apply to employees who are based outside of San Francisco and only work in the City by the Bay occassionally. In 2003, San Francisco passed its minimum wage ordinance, which applies to any employee who works more than 2 hours of work within San Francisco city limits during any workweek, even if the employee is based elsewhere (current SF minimum wage is $9.92). In 2007, San Francisco enacted its paid sick leave ordinance, which provides paid sick leave for any employee who works more than 56 hours per calendar year in the City of San Francisco. San Francisco also has its own agency to enforce these ordinances, the San Francisco Office of Labor Standards Enforcement. The SF OLSE has 16 enforcement employees and is run by Donna Leavitt, a former union official for the United Brotherhood of Carpenters Union.

The SF OLSE is serious about its mission. According to sfgate.com the agency has collected over $4 million dollars in back wages in the last 7 years. Just last week, San Francisco City Attorney Dennis Herrera sued Dick Lee Pastry, Inc. and its owners and operators on behalf of the SF OLSE for violating the minimum wage ordinance and other wage and hour regulations and is seeking back wages of more than $440,000 plus interest and penalties that it contends should have been paid to seven of their employees.

Employers should also be aware that two San Francisco supervisors have now proposed amendments to the minimum wage ordinance. If passed, these amendments would (a) require that employers notify workers in writing of any pending wage investigation, (b) double the penalties for retaliating against workers who participate in a wage investigation, (c) give SF OLSE investigators even more power by allowing them to cite employers immediately for violations, and (d) expedite investigations. If passed, this legislation certainly has the potential to adversely effect employers who employ workers within the San Francisco city limits. We will continue to keep you updated on this topic.

Court Weighs In on Meaning of Split Shifts

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California requires that extra compensation be paid to employees who are required to work "split shifts," generally referring to daily work shifts that are separatedby several hours ofnon-worktime. In SecuritasSecurity Services v. Superior Court (Holland), a group of employeesbrought a class action against their employer, alleging the employer failed to pay them required split shift premiums. Thealleged split shift? Working consecutive overnight shifts starting in the evening and ending in the morning. The employer defined its workday to begin at midnight each day and the employees therefore argued that by ending one shift in the morning and starting another in the evening of the same day, they were working "split shifts" and had to be compensated accordingly. The court appropriately rejected the plaintiffs' tortured interpretation of a split shift and held that split shift pay need not be paid in such circumstances involving consecutive overnight shifts. The Securitas decision is here.