Employers are still reeling from last week’s decision in Dynamex Operations West, Inc. v. Superior Court, in which the California Supreme Court said that employers (and even a state agency that protects workers) were using the wrong standard to distinguish employees and independent contractors under the state’s Wage Orders. A month before that, in Alvarado v. Dart Container Corporation of Californiathe same court announced a more employee-friendly way of calculating overtime for employees who receive bonuses.

These cases share two things. First, they put big smiles on the faces of lawyers who file wage and hour class actions. Second, both cases premised their decisions in part on California’s goal of protecting workers. In Dynamex, the court relied on the “general principle that wage orders are the type of remedial legislation that must be liberally construed in a manner that serves its remedial purposes.” The court in Alvarado noted that one of the “overarching interpretive principles” to guide its analysis was that “the state’s labor laws are to be liberally construed in favor of worker protection.” No mention was made of the fact that California workers have more far-reaching protections than workers in any other state.

While Dynamex and Alvarado provide examples from the last 45 days, the courts have been interpreting employee protections liberally for many decades. During that time, workers’ rights keep expanding further and further. I am certainly not suggesting that workers should not be protected from unscrupulous employers. But does anyone pay attention to the principle that employers who make every effort to follow the law shouldn’t be subjected to potentially ruinous litigation exposure each time the courts reinterpret the law in a new direction?

Determining whether a California worker is an independent contractor or an employee has always been difficult. Judges deciding the issue have complained that the test used by California courts “provides nothing remotely close to a clear answer.” Then there was the nail salon that was told by one state agency that its workers were employees and by another that they were independent contractors. So there’s no question that the law in this area has been messy.

On Monday, it got considerably messier. That’s when the California Supreme Court issued its decision in Dynamex Operations West, Inc. v. Superior Court. For years — even decades — judges, government agencies, and lawyers have interpreted the law to say that the key to distinguishing between employees and independent contractors was whether the company had the right to control the manner and means by which the worker accomplished the desired result. So if drivers for a gig-economy car service decided what days to work, when to start work on a particular day, where to work, what to wear, when to take breaks and for how long, and when to quit for the day, there was an excellent chance that they’d be considered independent contractors,

Under the California Wage Orders, which guarantee employees a minimum wage, maximum hours, overtime compensation, meal and rest breaks, and more, that is no longer the case. Now, according to the California Supreme Court, companies must meet a three-prong test to establish independent contractor status (“the ABC test”).

  • A) The company must not be able to control or direct what the worker does, either by contract or in actual practice. This is similar to the test used in the past.
  • B) The worker must perform tasks outside of the hiring entity’s usual course of business. So if you’re a driver for a ride service, a delivery person for a delivery service, or a seamstress for a clothing company, you can’t be an independent contractor no matter how little control the company has over you.
  • C) The worker must be engaged in an independently established trade, occupation, or business. It’s not enough that the company doesn’t prohibit the worker from having his own business or working for others. Instead, the court will look at factors such as whether the business is incorporated or licensed, whether it’s advertised, and whether it offers services to the public or other potential customers.

It is the employers burden to satisfy all three prongs to establish that the worker is an independent contractor. If it fails to establish one, the worker is entitled to be treated as an employee under the Wage Orders. (The Wage Orders themselves are not particularly helpful in this regard. For example, they circularly define “employee” as ” any person employed by an employer.”)

The Court spent 80+ pages explaining its rationale. Nowhere in that lengthy analysis was any recognition of the upheaval this opinion will cause. Millions of workers in the state that were considered independent contractors will now be deemed employees. This will require employers who have done everything they could to follow the law as it was then understood to reevaluate the nature of the relationship with many of their workers and either modify the relationship or provide them the pay and treatment required by the Wage Orders. They also face litigation, including potential class actions, from workers complaining that they were misclassified. And since this case only addresses the wage order definition, they need to apply different standards (which can lead to different conclusions) in deciding how to characterize workers for purposes such as workers compensation and payroll taxes. As I said, a messy situation just got messier.

If you are an employer in California, you are likely well aware of Labor Code § 226 and the many items that our state requires to be on employee paystubs: gross wages, legal name of employer, inclusion dates for the pay period, etc. (Labor Code § 226) Failure to adhere to all of Labor Code § 226’s paystub requirements can result in penalties owed to the employee, and worse still, the possibility of a dreaded PAGA action. It is no surprise then that vigilant employers have kept a close eye on their paystubs to ensure inclusion of all the necessary information.

Businessman handing over paycheck at desk in officeBut what about the paychecks themselves? Often forgotten is Labor Code § 212 which imposes certain requirements on employers who pay employees with traditional paychecks (as opposed to direct deposit). A traditional paycheck must be “payable in cash, on demand, without discount, at some established place of business in the state, the name and address of which must appear on the instrument…” Labor Code § 212(a). The point being that employees must have the opportunity to know where they can cash their paycheck and receive their wages immediately, without paying a fee.

Does this mean an employer must pick out one specific location where an employee can cash their paycheck and then list the location and its address on the check? Lucky for employers and employees, the answer is no. As long as the drawee of the check is a bank, the bank’s address need not appear on the paycheck itself. In other words, if the employer uses a bank with branches in California for its payroll checks, the employer need only list the name of the bank, so long as the check can be cashed immediately without a fee to the employee at any of the bank’s branches.

Failure to comply with Labor Code § 212 can result in minor penalties to an individual if they can establish that they were denied the opportunity to immediately obtain their wages. However, a purely facial violation on the check, and nothing more, could potentially result in a much larger PAGA lawsuit.

Although many workplaces find that the vast majority of employees receive their pay through direct deposit, there are still many employees who receive their wages in the form of a traditional paycheck. Accordingly employers should examine their paychecks and ensure the following:

  1. Paychecks should list the name of a national or state bank that has conveniently located branches where employees can cash their paychecks; and
  2. Employers should confirm with the bank used for its paychecks that all employees can cash their paychecks immediately at any of the bank’s locations without a fee (even if the employee does not otherwise bank there).

The Fair Labor Standards Act now permits back-of house employees to participate in mandatory tip pools, provided no tip credit is taken against minimum wage.  The Consolidated Appropriations Act, 2018 budget bill effectively amends the FLSA to clarify two important points: back of house employees MAY participate in certain tip pools however supervisor/manager/owners MAY NOT participate in tip pools.

How does that affect employers doing business in California?

Labor Code section 351 permits mandatory tip pooling for an employee who provides “direct table service” or who is in the “chain of service.”  In 2009, the court in Etheridge v. Reins International California, Inc. (2009) 172 Cal.App.4th 908, 922 held that kitchen staff contribute to the “chain of service” and could receive tips under section 351.

In 2011, the DOL issued a regulation prohibiting back of house employees from participating in tip pools regardless of whether a tip credit was taken.  There was litigation over whether the DOL had authority to issue such a regulation, however the Ninth Circuit in Oregon Restaurant and Lodging Association v. Perez, 816 F.3d 1080 (9th Cir. 2016) held that the DOL acted within the scope of their power, effectively invalidating Etheridge and Cumbie v. Woody Woo, Inc., 596 F.3d 577 (9th Cir. 2010).

Now that the DOL regulations have been reversed by the recently passed budget bill and FLSA amendment, it seems as though the holdings of Etheridge and Woody Woo are back, clearing the way for back of house employee inclusion in tip pools.

But, we are exercising caution before advising clients to change their tip pools.  Still pending is an appeal to the Supreme Court in the Oregon Restaurant and Lodging Association case as well as a still valid DLSE Opinion Letter from September 8, 2005 that does not include kitchen staff as part of the “chain of service.”  Making changes to your California tip pool at this juncture seems premature as we don’t want you to be the test case.

I am both proud and excited to be featured in two new training videos for workplace supervisors and human resources representatives handling California-specific and federal wage and hour issues.

Developed and produced by Kantola Productions, “California Wage and Hour Laws: What You Need to Know” is designed to help companies train their supervisors and human resources representatives to become better, more legally compliant managers.  The video consists of modules that break down the complex requirements regarding a variety of wage and hour matters including:

  • Exempt vs. Non-Exempt Employees
  • Employee vs. Independent Contractor
  • Overtime
  • Meal & Rest Breaks
  • Hours Worked

There is also a federal version of the video.

Both videos are available for purchase in several formats:  DVD, online training for up to 25 viewers, or instant streaming for a single user.  To receive a 20% discount, Fox Rothschild clients and their contacts can enter Fox20 in the “catalog code” box when filling out the online purchase form.

Take a look at a clip from the video below.  Enjoy!

Calculating the correct overtime pay rate in California has long been a complicated process.  The basic overtime rate is defined as one and a half times an employee’s “regular rate” of pay.  This purportedly “regular” figure may change from pay period to pay period when an employee earns shift differentials, different hourly rates for different jobs, or lump sum bonuses.  Such was the case in Alvarado v. Dart Container Corporation of California.

In Alvarado, the California Supreme Court considered the correct method of calculating overtime when an employee is paid a flat sum bonus.  The parties offered competing calculations to the Court.  The employer’s method spread the per-hour value of the bonus across all hours worked in a given pay period—including overtime hours.  The employee argued that the bonus should only be spread across the non-overtime hours worked.  In choosing between the two approaches, the Court emphasized California’s pro-employee policies:  “[W]e are obligated to prefer an interpretation that discourages employers from imposing overtime work and that favors the protection of the employee’s interests.”  The Court found that plaintiff’s version was “marginally more favorable to employees.”  Unfortunately, this doesn’t tell the whole story.  The opinion apparently requires employers to calculate the regular rate based on the “relevant pay period.”  This is inconsistent with established California and Federal principles that require regular rate calculations be performed on a weekly basis.  A “friend of the court,” or Amicus brief, was filed in this case on this very issue, and we are hopeful that the Court will issue an amended opinion, or other clarification.worker marking paper next to calculator

In the meantime, let’s look at an example. Suppose an employee works 90 hours in a two-week pay period (including ten hours of overtime), and the employee receives $15 per hour and a $100 bonus.  The value of the bonus must be calculated by dividing the $100 by the 80 non-overtime hours worked, which comes out to $1.25 per hour.  This would then be added to the employee’s straight time rate for an effective regular rate of $16.25 per hour.  Of course, the next step is to multiply the regular rate by 1.5 to obtain the basic overtime rate, and then multiply the number of overtime hours worked by the overtime rate.

The fun didn’t end there.  The Court drew a distinction between flat sum bonuses, like the one at issue in Alvarado, and bonuses that increase in rough proportion to the hours worked—such as piecework or commission bonuses.  In these cases, the Court stated “the payment of the bonus itself constitutes base compensation, including base compensation for overtime work, in which case one might be able to argue that only the overtime premium need be added.”  In other words, different bonuses require different overtime calculations.  Adding insult to injury, the Court proclaimed this interpretation is to be applied retroactively.

The big takeaway here is that employers must take a closer look at their bonus plans and overtime calculations to ensure compliance with the new standard.  Isn’t math fun?

Plaintiffs’ attorneys in California love making claims based on technical violations related to paystubs.  An employee will go see a lawyer complaining about wrongful termination or harassment or discrimination and the lawyer will say, “Let me see your paystub.”  Labor Code Section 226 lists at least 9 items that an employer must include on employees’ paystubs.  Even omitting one item (e.g., pay period dates on a “final” paycheck) can expose employers to extensive liability depending on the nature of the oversight, the number of affected employees, and how often the improper paystubs were issued.  Under the Private Attorneys General Act (“PAGA”) a single employee can bring a lawsuit on behalf of all affected employees, also known as “aggrieved employees,” regardless of whether those employees want to be included, and without having to go through the rigorous requirements of class certification.  [We told you about this in a 2009 California employment law newsletter,]

Up close of wage statementEmployees (or rather, the class action attorneys that bring these cases) do not have to prove that anybody was injured by the omission on the paystub because the code section provides an automatic penalty per paycheck in place of requiring employees to prove actual damages (which are typically non-existent).  Because employers have virtually no defense to these paystub cases, they are generally referred to as “gotcha” claims.

Recently a California Court of Appeal handed PAGA attorneys a “gotcha” of their own.  In Khan v. Dunn-Edwards Corporation, the appellate court upheld summary judgment dismissing Plaintiff Khan’s PAGA claims because he failed to comply with required administrative procedures.  Though Plaintiff’s regular paychecks appeared to be in order, his final paycheck failed to list the start date of the pay period.  On the basis of that single oversight on a single check, Khan and his attorneys filed their lawsuit seeking to recover penalties on behalf of a group of employees who may have received a similar final paycheck.  Khan’s notice and exhaustion letter to California’s Labor and Workforce Development Agency, however, was peppered with references to violations of his rights, and nowhere referenced any other employee other than himself.  The Court was not impressed.  It held that Khan’s use of the word “my” instead of “we,” or any other language indicating that he was seeking to claim penalties on behalf of anyone but himself, constituted a failure to give proper notice to the individuals involved, and a failure to comply with administrative requirements.  Thus, the Court upheld summary judgment in favor of the employer, and dismissed Khan’s PAGA claim.

If you are in the unfortunate position of having to defend yourself (or a client) against a PAGA action, make sure you take a very close look at the employee’s letter to the Labor Workforce and Development Agency to make sure the employee has followed every technical requirement of the law in giving notice to the employer and the Agency.  You might find a technical shortcoming in the letter on which to defend your client.  Or better yet, make sure that your employees’ paystubs contain the required information in advance.

Employees generally love Alternative Workweek Schedules. They prefer, for example, working four 10-hour days to working five eight-hour days. They work the same number of hours but they get an additional day off and less time commuting. The advantage to employers is that they can give employees the schedule they prefer without incurring additional overtime liability. But before California employers can implement an Alternative Workweek Schedule (or AWS), they need to jump through all sorts of hoops, including having secret ballot elections where two thirds of the affected employees approve the arrangement. All this is spelled out in Section 3 of the Wage Orders. Get it wrong and you risk employees coming back down the road and asking for years’ worth of unpaid overtime.

Once an employer in California adopts an AWS, different rules apply to (for example) sending employees home early, transferring them to different work units and locations, and changing their schedules. The following Q&A addresses many of these issues.

1.   What happens if an employee scheduled to work 12 hours as part of an AWS is asked to work a 12-hours shift on a different day?

Because they are not subject to an AWS that covers that day, all hours they work on that day would be considered overtime. The employee would get 1.5 times his regular rate of pay for the first 8 hours and double his regular rate of pay for the last 4 hours.

2.   What happens if an employee scheduled to work 10 hours as part of an AWS is sent home after 9 hours?

If you require the employee to work fewer hours in a day than they’re normally scheduled to work, you lose the advantage of the AWS. So in this case, you pay overtime (time and a half) after 8 hours on that day.

3.   What happens if an employee scheduled to work 10 hours as part of an AWS is sent home 10 or fewer minutes before their shift ends?

Pay them according to the AWS, but don’t make a habit of this.

4.   What happens if an employee scheduled to work 10 hours as part of an AWS is sent home between 10 and 30 minutes early?

Don’t do that. Keep them around until the shift ends. It’s cheaper to pay them to do nothing than to unnecessarily incur an hour and a half or more of overtime.

5.   What happens if an employee scheduled to work 10 hours asks to leave after 9 hours?

If the employee volunteers to work fewer hours than they’re scheduled as part of an AWS, there is no overtime liability. But have the employee put their request to leave early in writing (even e-mail) to avoid disputes later as to whether it was voluntary.

6.   What happens if an employee scheduled to work 10 hours as part of an AWS is required to work 12 hours on that day?

The additional 2 hours would be paid at time and a half. Any hours beyond 12 would be at double their normal hourly rate.

7.   What happens if an employee who is subject to an AWS is asked to work his normal shift, but at a different location that does not have an AWS?

This work would not be subject to the AWS and would be subject to normal overtime rules.

8.   What happens if an employee who is subject to an AWS volunteers to work his normal shift, but at a different location that does not have an AWS?

Same as paragraph 7.

9.   What happens if an employee who is not subject to an AWS is asked to work on a day she is normally scheduled, but at a different location that has an AWS?

This work would not be subject to the AWS and would be subject to normal overtime rules, unless (1) the employee is told that the different location has an AWS; and (2) the employee works at the different location for one or more full workweeks (as defined under the AWS). If both conditions are met, the employee’s overtime can be calculated the same as other employees who are subject to the AWS for each full workweek the employee works at that location. To avoid disputes later on, have the employee document that she was informed of the AWS.

For example, assume that (1) an employee is assigned from Monday, January 1st through Thursday, January 18th to a location with an AWS; (2) the employee is told in advance about the AWS; and (3) the location’s workweek under the AWS begins Monday at 12:01 a.m. The employee would be paid according to the AWS from Monday, January 1st through Sunday, January 14th and paid normal overtime (e.g. time and a half for 8-12 hours) for time worked between January 15th and 18th (since that is not a full workweek).

As another example, if the situation was the same as in the last paragraph, except the employee learned on January 2nd that the new location had an AWS, the employee would be paid according to the AWS from Monday, January 8th through Sunday, January 14th and paid normal overtime the rest of the time.

10. What happens if an employee who is not subject to an AWS volunteers to work on a day she is normally scheduled, but at a different location that has an AWS?

Same as paragraph 9.

11. What happens if an employee who is subject to an AWS works only at a location that is subject to a different AWS?

The employee would be treated the same as in paragraph 9. In other words, the employee would be paid according to the AWS at the location he was assigned to for each full workweek he worked there, as long as he knew about that AWS in advance.

12. What happens if an employee who is subject to an AWS works in the same workweek at his normal location and at a location that is also subject to an AWS?

The time the employee works at his normally assigned location would be paid according to the AWS at that location. The time he works at the second location would be treated as overtime (time and a half for the first eight hours in a workday, as long as the employee hasn’t yet exceeded 40 hours for the workweek and double time after eight hour in a workday or for all hours beyond 40 in a workweek). If the two locations have different workweeks, use the workweek at the location to which the employee is normally assigned.

13. If an employee is repeatedly asked to deviate from the approved AWS, can the employer lose the benefits of the AWS?

Yes, if the deviations are more than “occasional.”  As a general rule, an alternative workweek must be “regularly scheduled.”

Takeaway: How typical of California law! Employers offering a schedule that employees prefer have to negotiate a maze of complex requirements and face serious exposure for even an accidental misstep. California employers wishing to implement an Alternative Workweek Schedule should get guidance from qualified counsel in doing so. Those with one in place should ensure that their managers understand the consequences of deviating.

Illustration of a fox with sunglassesWe often blog about how different California employment laws are when compared to the rest of the US.  Whether it is the minimum wage, mandatory harassment prevention training requirements, or that funky law called PAGA, find out how to comply with laws in what we fondly refer to as the United Republic of California with this handy guide to Doing Business in California.

Many thanks to Sahara Pynes for her assistance in updating this informative guide.  Check it out on the Fox Rothschild website.

The California state flag