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Some candidates were retained by Surrex as consultants, and their services were leased to Surrex’s clients. The plaintiffs’ compensation for this type of placement was a percentage of the “adjusted gross profit” earned by Surrex. The starting point of this calculation was the rate received from Surrex’s client for the services of the consultant. From this, Surrex subtracted the costs of employing the particular consultant – typically the consultant’s pay, benefits, and expenses as well as an overhead adjustment factor. Commissions were paid as a percentage of the resulting “adjusted gross profit.”

The plaintiffs argued that only time spent finding new client companies was time spent selling, and contended that none of their work to identify and recruit candidates was sales activity. The court rejected this argument. Finding that the plaintiffs’ “primary duty was to recruit ‘candidates’ for employer ‘clients,’” the court agreed with the trial judge that ignoring all the activity that must be done before the actual point in time when a sale is made “perceives the word sales in a vacuum contrary to the job description of any salesman.” The tasks associated with identifying job candidates were “essential prerequisites necessary to accomplishing the sale.” Finding these activities to be sales related, the court concluded that the plaintiffs were “employed principally in selling a product or service.”

The plaintiffs also argued that pay earned as a percentage of the “adjusted gross profit” could not qualify as a commission because the formula was “far too complex” and was not based solely on the price of services sold. They contended that California courts require that a “commission” be based solely on a percentage of price. The Muldrow court rejected this argument, branding it an “excessively narrow and wooden application” of prior cases, neither of which had any occasion to address the question.

The court also distinguished decisions cited by the plaintiffs because the employees in those cases increased the profitability of their companies by increasing revenue, while plaintiffs’ efforts affected not only the revenue received by Surrex, but the costs incurred. A compensation plan based solely on price would reward the plaintiffs’ efforts to increase profits by increasing revenue, but do nothing to reward those who helped Surrex achieve greater profits by limiting costs. Referencing older cases addressing commission disputes, the court noted that “a commission based on profits is hardly a concept foreign to California law.” The court concluded that “Surrex’s commissions were sufficiently related to the price of services sold to constitute commissions for purposes of the commissioned employees exemption (Cal.Code. Regs., tit. 8, § 11070, subd. (3)(D)).”

The Muldrow decision applies a dose of common sense in answering some fundamental questions that had not been answered before. In the future, however, employers should consult counsel before relying on Muldrow, to be certain that it has not been taken up for review before the California Supreme Court. Once review is granted, as those who are “waiting for Brinker” are well aware, a case cannot be cited or relied upon in court proceedings. Because it provides new answers, Muldrow is a potential candidate for review.

See’s filed a writ of mandate with the Court of Appeal, Fourth Appellate District, which was denied. See’s subsequently petitioned for review with the California Supreme Court. That petition was supported by amicus curiae letters from numerous employer groups including the California Chamber of Commerce, Employer’s Group, California Retailers Association, and California Employment Law Council. Those groups urged the California Supreme Court to review the decision because of its importance to California employers, who now face uncertainty with respect to their timekeeping practices.

California employers long have relied on the position taken by the federal Department of Labor (“DOL”), and expressly adopted by the California Division of Labor Standards Enforcement (“DLSE”), that rounding to the nearest one-tenth or one-quarter of an hour is permissible as long as, over a period of time, it does not fail to compensate employees for all hours worked. (See 29 C.F.R. § 785.48(b); DLSE Manual §§ 47.1 and 47.2). In these circumstances, no California appellate court has found rounding to be unlawful, and other federal and state trial courts have upheld the practice.

In briefing, both See’s and employers’ groups warned that if the high court did not intervene, employers would find themselves fighting against a wave of class action lawsuits challenging the validity of rounding practices that employers had in good faith believed were lawful. This would force employers to eliminate rounding practices or face the risk of litigation, which frequently results in large settlements because of the high costs of such litigation.

The California Supreme Court’s order requiring appellate review of the trial court’s decision is welcome news for employers. The issue is one of first impression for the California appellate courts, and the hope is that the Court of Appeal's ruling will clarify for employers whether rounding employee time entries is legal in California.

The opening brief in the Court of Appeal is due on March 5, 2012, with a responsive brief and applications to file amicus curiae briefs due by April 4, 2012.

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Nationwide continuously maintained that Special Investigators were properly classified as exempt administrative employees under federal and state wage and hour law. To qualify for the FLSA’s administrative exemption, employees must be compensated at a rate not less than $455 per week; their “primary duty” must be the “performance of office or non-manual work directly related to the management or general business operations of the employer or the employer’s customers;” and the primary duty must include “the exercise of discretion and independent judgment with respect to matters of significance.” In March 2010, the court found that Nationwide had satisfied the first two elements of the administrative exemption test, but determined that material issues of fact existed as to the third element.

In September 2011, a two-week trial commenced before U.S. District Judge Edmund A. Sargus Jr. on the remaining issue of whether the Special Investigators’ primary duty includes the exercise of discretion and independent judgment. The parties called sixteen witnesses to testify at the trial, submitted testimony from two additional witnesses via deposition transcript, and admitted dozens of exhibits into evidence. The court ultimately concluded that the Special Investigators’ primary duty is to conduct investigations into suspicious claims for the purpose of resolving indicators of fraud present in those claims. The court further concluded that this primary duty includes the exercise of discretion and independent judgment with respect to matters of significance in at least two ways: Special Investigators: (1) are tasked with resolving indicators of fraud; and (2) have nearly unilateral discretion to refer claims to law enforcement or the National Insurance Crime Bureau (“NICB”).

While the plaintiffs contended that resolving indicators of fraud was merely the gathering and reporting of facts, the court disagreed. The court concluded that the Special Investigators determine the truth about what happened on a suspicious claim, which “necessarily requires judgment and discretion.” The court noted that nearly all of the Special Investigators who testified at trial characterized their investigations as searches for the truth and that “A doctorate in philosophy is not required to realize that the ‘truth’ is not an entirely objective concept. Determining truth requires ‘factual findings,’ a process that necessarily requires judgment and discretion.” In addition, because the Special Investigators’ resolution of fraud indicators can have an influence on a claims adjuster’s decision to pay or deny a claim, they exercised discretion and independent judgment on matters of significance.

The plaintiffs also claimed that referrals to law enforcement and NICB are automatic. However, the court noted that such referrals are made when the Special Investigator is unable to resolve the indicators of fraud. Accordingly, the judgment and discretion that is inherent in the resolution of fraud indicators also attaches to the decision to make a referral. In addition, because these referrals can subject individuals to criminal prosecution, they pertain to matters of significance.

Finally, because the parties stipulated that the New York claims would rise or fall with the FLSA claims, the court awarded judgment to Nationwide on those state claims, and also awarded judgment to Nationwide on the California state law claims after determining that the Special Investigators satisfied the California Labor Code requirement that they are “primarily engaged in the duties that” meet the administrative exemption, and “customarily and regularly exercise[] discretion and independent judgment in performing” those duties.

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The trial court granted the defendant summary judgment, finding that the plaintiff was an independent contractor under the common law standard set forth in S. G. Borello & Sons, Inc. v. Department of Industrial Relations, 48 Cal. 3d 341 (1989), and therefore not entitled to business expense reimbursement or timely payment of wages.

The plaintiff appealed, asserting it was error to apply the common law standard rather than the broader statutory standard under Labor Code section 2750. The court rejected the plaintiff’s contention, stating that “section 2750 does not supply such a definition of ‘employee’ that is clearly and unequivocally intended to supplant the common law definition of employment for purposes of Labor Code section 2802.”

The court then upheld the determination that the plaintiff was an independent contractor under the common law. It found that Mutual’s managers made themselves available to assist agents, but did not supervise them, offered training, but did not make it mandatory, and offered software as a “best practice.” Facilities were offered to agents, who paid a fee for use. While paid at regular intervals, there was no guarantee of compensation. Her appointment was non-exclusive, and she was free to sell other companies’ policies. She was engaged in a distinct occupation requiring licensing by the Department of Insurance, paid all her own expenses, provided her own tools, and the parties believed they were forming an independent contractor agreement. Also, the court noted that while the contract was “at-will,” such clauses could be included in independent contractor agreements. The court thus concluded that there was sufficient evidence to support the trial court’s grant of summary judgment.

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In Harris, the California Supreme Court overruled the Court of Appeal, which held that the claims adjusters were “production” workers because their work “ investigating claims, determining coverage, setting reserves, etc. is not carried on at the level of policy or general operations, so it falls on the production side of the dichotomy.” Thus, the lower appellate court concluded, they did not perform in a role that was “directly related to management policies or general business operations” and were therefore not exempt administrative employees. The California Supreme Court disagreed.

First, the court rejected the Court of Appeal’s almost exclusive reliance on the administrative/production worker dichotomy analysis. The rigid application of this analysis, the court stated, ignores the limitations of the dichotomy and results in a “strained attempt to fit the operations of modern-day post-industrial service-oriented businesses into the analytical framework formulated in the industrial climate of the late 1940s.” The court clarified, however, that it was not holding that “the dichotomy can never be used as an analytical tool. We merely hold that the Court of Appeal improperly applied the administrative/production worker dichotomy as a dispositive test.”

Second, the court clarified that under the federal regulations California looks to for guidance in applying state exemption classifications, work that is “directly related to management policies or general business operations” includes “advising management, planning, negotiating, and representing the company.” The court admonished the Court of Appeal for interpreting this prong of the administrative exemption too narrowly. In other words, work may be directly related to management policies or general business operations even if it is not performed at the corporate policy level. In this regard the court pointed out that the Ninth Circuit and other federal courts, applying recent applicable federal regulations, have determined claims adjusters satisfy the administrative exemption under the Fair Labor Standards Act “if they perform activities such as interviewing witnesses, making recommendations regarding coverage and value of claims, determining fault and negotiating settlements.”

Third, the court emphasized the importance of assessing the language of the relevant statutes and wage orders as applied to the particular facts of each case, noting “the difficulty in relying on the particular role of employees in one enterprise to deduce a rule applicable to another kind of business.”

The Harris decision therefore is a victory for Liberty Mutual, but it is also a good reminder to California employers of the importance of reviewing the particular circumstances and actual job duties of their exempt administrative employees – as well as their other exempt employees – not just relying on their job descriptions to determine that the exempt classifications are appropriate.

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Among the open questions about the form and its use are:

• Whether its reference to business or entities that “administer wages or benefits” applies to third-party administrators of benefits;
• The meaning of terms in the form such as “worksite employer,” “recruiting service,” and “payroll processing service;”
• What would qualify as a "system where the worker can acknowledge the receipt of the notice" in FAQ 9; and
• Whether the form allows employers to designate that an employee is covered by an employment agreement that is both oral and written.

There is no restriction on covered employers developing their own separate, stand-alone section 2810.5 form, and including additional information, as long as the elements of the Labor Commissioner’s template form are included.

Employers who have questions should consult with experienced California employment counsel regarding compliance with the required wage notice and other aspects of the WTPA. For more information concerning the requirements of the WTPA, including a detailed discussion of section 2810.5’s requirements, please see Littler's ASAP, California's New Wage Disclosure Notice and the Wage Theft Prevention Act of 2011.

The court concluded that, inasmuch as all of the meetings were scheduled at least four days in advance, and inasmuch as the class representative was paid for at least half of each scheduled meeting, no obligation to provide reporting pay was triggered. In the court’s opinion, no reference to the duration of the plaintiff’s usual day’s work day was appropriate inasmuch as all of the meetings were scheduled. Had the plaintiff been called in without any advance notice on a vacation day, reference to the usual day’s work might have been relevant.

The court applied a straightforward reading of the split shift premium formula to deny the first class representative additional wages. A split shift is any two work periods separated by non-working, non-paid periods other than bona fide meal or rest periods. The split shift premium formula calls for calculating whether any premium is due by adding one hour to the number of hours actually worked in the day, and multiplying the total hours by the minimum wage. That result would be subtracted from the employee’s wages for the day and any difference would then be due as a split shift premium. Inasmuch as the first class representative’s wage rate was substantially in excess of the minimum wage, the split shift formula did not result in additional wages being due. The court rejected the first class representative’s argument that the split shit premium should always result in an additional hour of pay, because the Wage Orders are clear and specific as to the appropriate wage rate reference.

The court found that the second class representative was not entitled to pursue her claims for reporting pay and split shift premiums because the employee had signed a release of claims in exchange for enhanced severance benefits. The court found that there was a bona fide dispute as to the plaintiff’s entitlement to any additional wages and, where such a dispute exists, an otherwise enforceable settlement agreement would not be invalid.

Finally, the court reversed the award of attorneys’ fees in favor of the employer. The court noted that section 1194 of the Labor Code provided for fees only to a prevailing plaintiff where the plaintiff’s claims concerned minimum wage or overtime. The court had no doubt that a claim for a split shift premium, which is calculated in relation to the minimum wage, was a minimum wage claim. Given the inter-related nature of the split shift and reporting pay obligations, the court concluded that a claim for reporting pay should also be considered to be a minimum wage-type claim. As fees could only be awarded to the prevailing plaintiff with respect to such minimum wage claims, no fees could be awarded to the defendant employer.

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Second, the store argued that any trial would actually require a series of mini-trials to determine whether there is a reasonable need to offer a seat based upon each individual cashier’s specific duties, store, and other responsibilities. The store argued it would be deprived of its due process rights if it were not able to defend itself on a cashier-by-cashier basis.

Ultimately the court agreed with the store, and held that the plaintiff was not an adequate and competent representative and that allowing her to prosecute the action in a representative capacity pursuant to PAGA would be unmanageable. Thus, with trial set for January 23, 2012, the plaintiff is left to pursue only her individual PAGA claim. The penalties provided for by PAGA are subject to a one year statute of limitations and limited to $100 per pay period for the initial violation and $200 per pay period for each subsequent violation – undoubtedly a significantly lower amount than the plaintiff initially sought to recover.

While this case has significant implications for the ever-popular seating lawsuits plaguing many California employers, it also has a wider impact on all cases asserting PAGA claims. The court reaffirmed that a defendant may proactively utilize a motion to strike in order to test a plaintiff’s representative status and the manageability of a representative claim, while at the same time providing some guidance for defending against a PAGA representative action. 

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What Does It Mean to “Provide” a Meal Period?

Counsel for the employees, Kimberly Kralowec, argued that California law protects employees by requiring affirmative steps to be taken by the employers to ensure that work stops for the required 30 minutes for meal periods. She was immediately pummeled with questions by most of the justices regarding this position, particularly the practical effect on both employees and employers. A majority of the court seemed inclined to interpret the statutes and wage orders to give employees the flexibility to decide whether to work through meal periods.

Justice Goodwin Liu asked plaintiffs’ counsel, “isn’t the hallmark of a meal period that the employer suspends control? Shouldn’t the employee be allowed to work if he wants?” When plaintiffs’ counsel responded, “no, the employee can’t work; the employer exercises control over the employee to prevent the employee from working,” Justice Liu followed up by asking “isn’t this coercive? Isn’t the most worker-friendly interpretation that the employee can do what he or she wants?” Plaintiffs’ attorney disagreed.

Justice Kennard similarly inquired “how does the employer enforce that standard? Isn’t that tantamount to an “ensure” standard? Why not give the employee the flexibility?” Justice Baxter asked how it could be “protective” of the employee to require the employer to discipline or terminate the employee if that employee disregards the employer’s instructions and works during a meal period? Justice Werdegar skeptically asked plaintiffs’ counsel, “you’re saying in order to protect the employee, if the employee freely chooses to work he should be disciplined?” Plaintiffs’ counsel responded, “yes,” because the off-duty meal period is mandatory, the employer is in control and therefore should discipline the employee if he or she works during the meal. This standard, Ms. Kralowec contended, is the same as with overtime, where an employee can be fired for working without authorization but still must be paid.

Defense counsel Rex Heinke argued that an employer has an affirmative duty to provide an opportunity to take a 30-minute meal period relieved of all duty, but agreed with Justice Kennard that the statutory language provides some flexibility because the employee decides whether to take that time as an off-duty period.

When Must a Meal Period Be Provided?

Another issue raised by this appeal is when the employer must provide a meal period—in the middle of the shift or anytime within the shift? Brinker employees did not necessarily wait until the middle of their shifts to take a meal period and thus might work more than five hours before receiving a second meal period or ending their shifts. Plaintiffs contended that Labor Code section 512 requires employees to be provided a meal before the end of the fifth hour and at least once every five hour “work period.”

Justice Kennard interpreted the plaintiffs’ argument as providing no flexibility on this issue, summarizing that “after five hours you stop work.” She read a long passage from a Labor Commissioner’s hearing in which restaurant workers, truck drivers, nurses and other employees objected to being forced to take meal breaks by the end of the fifth hour. She thus seemed sympathetic to Brinker’s position that meal periods can be offered anytime within the shift.

Brinker’s attorney argued that the wage order does not say that an employee earns a meal period for each consecutive five hours of work. The statute says only that those employees working “more than 10 hours per day” are entitled to two meal periods, and that plaintiffs’ interpretation renders the language requiring a second meal after ten hours a day “mere surplusage.” The Industrial Welfare Commission, moreover, specifies that rest periods shall, insofar as practicable, be offered in the middle of the work period, but makes no similar requirement for meal periods, except in the wage order governing the entertainment industry. To the extent the Wage Orders require meal periods for every five hours of consecutive work, even if the Wage Order would give employees “greater protections”—that interpretation conflicts with the Labor Code and should be disregarded, according to Brinker’s attorneys.

Justice Liu, however, differed with that interpretation, contending that the language of the Wage Order instead means that after any work period of five hours—including one taken after a 30-minute meal—gives the employee the right to a meal period, even a second meal period in an 8- or 9-hour day. For instance, if the employee started work at 8 a.m., took a meal period from noon to 12:30 p.m., and then worked until 6 p.m., he would be entitled to a second meal because he worked more than 5 hours after lunch. Mr. Heinke responded that the commission that issued the wage orders specifically deleted language that would have so required, and adopted the words “per day” to specify the obligation as to provide one meal period per day unless the employee worked 10 or more hours in that day. Since the other justices did not offer an opinion, it is unclear which way the court will go on this issue.

Rest Periods

The parties’ positions were just as much at war with respect to the interpretation of the employer’s obligation to authorize and permit rest periods. Plaintiffs in their briefs characterized the court of appeal’s ruling as entitling an employee working an eight hour shift to only one rest break because the first rest break would be granted only “after” the first four hours of work. Brinker retorted that the appellate court found that such an employee would be entitled to two rest breaks in one eight-hour period.

In oral argument before the California Supreme Court plaintiffs focused on their contention that Brinker’s policies discouraged or impeded employees from taking rest breaks. Brinker never paid the one hour’s wage to any employees, never conducted a compliance audit, and did nothing to determine or monitor compliance, they argued. Plaintiffs claimed that Brinker’s policies impeded, frustrated or dissuaded employees from taking rest breaks because their tips were not pooled, so they would lose tips when they took rest breaks. Justice Corrigan inquired whether plaintiffs were arguing that the employer “must” use a tip-pooling policy, and plaintiffs’ counsel responded, no, but the court erred in not allowing plaintiffs as a class to challenge the practice of penalizing employees who took rest breaks. Justice Liu seemed incredulous, asking why can’t the employer structure tips as it chooses, and how is this unlawful? Plaintiffs responded that Brinker’s practice of denying tip pooling created a “coercive atmosphere” that in their view violated the Labor Code and the Wage Orders.

Class Certification

Equally important given the flood of class actions being brought, the California Supreme Court has been asked to decide some difficult and important issues involving the standards for certifying classes alleging missed meal and rest periods, particularly what evidence can establish liability on a class-wide basis:

• Did individual issues predominate over common issues, thereby precluding class certification?
• Could Brinker’s meal policy coupled with records of workers’ shift lengths establish violations of Labor Code section 226.7, supplemented with representative employee evidence and survey/expert testimony—even assuming that meal periods only had to be “made available” to employees?
• Could plaintiffs establish liability for rest period violations through common corporate policies, corporate time records, representative employee testimony and/or survey evidence?
• Did plaintiffs’ expert survey and statistical evidence prove common issues sufficient to support class certification?
• Did the appellate court reweigh the evidence in overturning class certification?

The trial court certified a class back in 2006, finding that a common legal question of whether Brinker must force employees to take meal breaks predominated despite the individualized questions Brinker raised to defend against a finding of liability. The appellate court reversed, and plaintiffs now seek to reinstate that class.

Unfortunately, the parties did not have sufficient time to address these issues in oral argument. Plaintiffs’ counsel did argue that class certification was appropriate based on what he characterized as common issues regarding Brinker’s asserted policies or practices to dissuade, impede or discourage taking rest breaks. Justice Liu asked how rest periods could be susceptible to class treatment when the employer is not required to keep records showing that they were in fact taken, particularly without a written policy that proved that rest periods were denied or impeded. Justice Werdegar followed with her own question that suggested that she agreed that at least this issue was amenable to class certification. Justice Liu returned to this issue by challenging plaintiffs’ counsel as having no basis to show that Brinker acted unlawfully if it allowed each waiter to keep his/her own tips rather than pooling them.

We now will await the court’s decision, due out by early February 2012.

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Chen argued that Nicholas Labs was required to pay his attorneys’ fees of about $90,000 by virtue of: (1) an indemnification clause in a certain operating agreement; (2) California Corporations Code section 317; and (3) California Labor Code section 2802. Both the trial court and the Court of Appeal rejected all three theories.

First, the operating agreement did not apply because Chen did not work for the entity that was a party to the operating agreement—instead, he worked for a related entity, Nicholas Labs, that had no operating agreement with an indemnification clause.

Second, Corporations Code section 317, which requires a corporation to indemnify legal expenses incurred by its agents under some circumstances, did not apply because Nicholas Labs was an LLC, which was not covered under that section of the Corporations Code.

Finally, the court addressed Labor Code section 2802. Section 2802 requires an employer to “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. The question of first impression presented was whether section 2802 requires an employer who unsuccessfully sues its employee to foot the employee’s legal costs? Generally, the court explained, the word “indemnify” implies an employer’s obligation to pay the employee’s defense fees if the employee is sued by a third party for acts taken by the employee in the course of his or her job.

The court found little guidance in prior case law, but the court’s consideration of the “more expansive fabric of the law suggests that any interpretation of section 2802 which would allow the statute to become a unilateral attorney fee statute in litigation between employees and employers would be incompatible with that larger body of law.” For example, the California Uniform Trade Secrets Act only allows a successful party to be awarded attorneys’ fees under limited circumstances, such as where the employer’s suit against the employee for misappropriation of trade secrets was made in “bad faith.” Cal. Civ. Code § 3426.4. Construing Labor Code section 2802 to automatically award attorneys’ fees to an employee who successfully defends any suit by his/her employer would contradict the Trade Secrets Act, as well as other laws pertaining to attorneys’ fees.

In a footnote, the court addressed another significant issue and commented that an employee does not need to win an employment-related lawsuit brought by a third party in order to be entitled to indemnification by the employer for defending against such a lawsuit. As long as the employee was acting within the scope of his or her employment, or in obedience to the employer’s direction, the employer is obligated to pay the employee’s legal fees—even if the employee ends up losing the lawsuit. Likewise, if an employer refuses to pay when it is obligated to do so, the employer will also be forced to pay the legal fees run up by an employee who subsequently is required to sue the employer to obtain the proper reimbursement.

In general, the Nicholas Laboratories decision reinforces the so-called “American Rule” of attorneys’ fees—unless a specific law or contract says otherwise, each side pays their own fees. As a result, Nicholas Laboratories provides some protection for employers who sue their employees in California for wrongful conduct, such as misappropriation of trade secrets or other unfair competition, while still providing protection for employees who are sued by third parties for acts taken in the scope of their employment.

¹ Case No. G044105, Fourth Appellate District, California Court of Appeal.

² The claims alleged in the complaint included breach of contract, breach of the implied covenant of good faith and fair dealing, conversion, negligence, money had and received, unjust enrichment, and constructive trust.

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With major support coming from the California Rural Legal Assistance Foundation, A.B. 240 was introduced as a solution to the perception of unequal remedies. The bill’s proponents argued that the current system discouraged employees from bringing their claims in the simpler and less-costly DLSE process, as that agency could not award liquidated damages for the subject claims as a court could. The bill’s supporters also included various labor organizations, while an array of business entities opposed the measure. The bill was based on a nearly identical measure passed by the Legislature in 2007, but vetoed by then-Governor Arnold Schwarzenegger.

Effective January 1, 2012, the difference in remedies between filing such a claim in court or before the Labor Commissioner will be eliminated, as A.B. 240 amends California Labor Code sections 98 and 1194.2. The amended statutes will allow the Labor Commissioner to award liquidated damages to a successful employee. The Labor Commissioner will also have the discretion, as the court now does, to award reduced or no liquidated damages if the employer proves that it acted in good faith and that it had reasonable grounds for believing that its act or omission was not a violation of any provision of the Labor Code relating to the minimum wage, or an order of the commission.

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The appellate court reversed summary judgment in favor of the employer, finding that the question of whether the employer's particular sabbatical program granted a legitimate sabbatical (which does not have to be paid out upon termination), or was a subterfuge for additional vacation time, could not be answered based upon the facts before it. In reaching its decision, the court set out a four-part test for determining whether paid time off qualifies as a sabbatical and, by extension, when paid time off must be treated as vacation.

The factors of this new test are: (1) frequency of the leave; (2) length of the leave; (3) whether the leave must be in addition to regular vacation; and (4) whether the leave must be for the purpose of enhancing the employee's value as an employee upon his or her return to work.

Applying the four factors to the case before it, the appellate court found there was conflicting evidence regarding the employer's purpose in establishing the sabbatical program, and remanded the case for trial on that issue.

To learn more about the decision and its implications for employers, please continue reading Littler's ASAP, California Appellate Court Answers the Question "What Is Vacation?", by Margaret Gillespie.

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CarMax classified its sales consultants as overtime exempt based on the commissioned salesperson exemption. In California, an employee covered by Wage Orders 4 or 7 may be exempt from the overtime requirements if that employee earns more than one and a half times the minimum wage and more than half of the employee’s compensation represents commissions. The California Labor Code also has a section applicable to vehicle dealers, which defines commissions as “compensation paid to any person for services rendered in the sale of such employer’s property or services and based proportionately upon the amount or value thereof.”² Although this code section and the case dealt with vehicle dealers, the court noted that other courts have found that the code section’s definition of commissions are more generally applicable.

The California Supreme Court had previously approved a two-part test to determine whether an employee is a commissioned salesperson exempt from overtime. First, an employee must be involved principally in selling a product or service. Second, the amount of the employee’s compensation must be a percent of the price of the product or service.³ Although CarMax’s compensation plan used a formula that resulted in a uniform payment per vehicle sold as opposed to a strict percentage of the price, the court in Areso found that under the language of the statute, the pay plan was based proportionately on the amount of vehicles sold, and thus qualified as a commission. The court thus distinguished between commissions based upon the value (price) of a product, and those based upon the amount (number) of product sold. The court rejected the position of the California Division of Labor Standards Enforcement, which had published in its enforcement manual that uniform payment constitutes “piece-rate” work and not commissioned sales work. The court held that piece-rate work pays employees for each piece of product finished, appointment made, or procedure completed – whereas the employees here made sales of property or services. The court held that although the uniform fee was a one to one proportion, the compensation was still proportionate to the amount of vehicles sold, and was thus a commission under California law, exempting those sales consultants from overtime pay under California’s wage orders.

¹ Case No. B219981, May 20, 2011, Ct. of Appeals, 2nd Appellate Dist., 1st Div.

² California Labor Code § 204.1. The primary purpose of Labor Code § 204.1 was to permit car dealerships to pay their salespeople once a month instead of biweekly as imposed upon other California employers.

³ Ramirez v. Yosemite Water Co., (1999) 20 Cal. 4th 785.

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Instead of a seminal decision initially understood to fundamentally change California employers’ ability to define a workweek, this re-issued decision reaffirms that employers may set workweeks as seven consecutive 24-hour periods that differ from an employee’s shift, so long as there is a bona fide business reason. Nonetheless, the court utilized a fact-based analysis to determine that the employer in this case did not have a bona fide business justification for setting a workweek that differed from the shifts worked by its employees.

While this revised opinion bodes much better for employers than its predecessor, California employers should continue to be cautious in using a workweek that differs from the work schedules of its employees, as such a workweek may be construed as an attempt to avoid overtime obligations. Likewise, use of an artificial workweek or workday may also result in the requirement to pay split-shift differentials under California law.
 

¹ Seymore v. Metson Marine, Inc., 193 Cal. App. 4th 64 (2011) ("Metson 1"), rehearing granted, Depublished (Mar. 25, 2011); subsequent opinion on rehearing at Seymore v. Metson Marine, Inc., 2011 Cal. App. LEXIS 442 (2011) ("Metson 2")

² Metson 1, 193 Cal. App 4th at 72.

³ Metson 2, 2011 Cal. App. LEXIS 442.

⁴ Id. at *11.

⁵ Id. at *9.

The guards’ wage statement claim fared no better but for a different reason. The crux of this claim was that the wage statements did not specify how many hours guards worked beyond twelve hours in a day at “double time” or the wage paid at double time rates. For this alleged violation of the Labor Code, the guards sought civil penalties under California’s Private Attorney General Act (PAGA), which allows a single employee to seek penalties on behalf of all “aggrieved employees” for Labor Code violations. But to pursue such a claim in court, PAGA requires an employee to jump through a procedural hoop—pre-suit notification to the California Labor Workforce Development Agency (LWDA) of his or her claim. The plaintiff guard here had notified the LWDA of his rest break allegation, but he failed to mention any violation of the law requiring accurate wage statements. Having failed to jump through this hoop, the judge found that the plaintiff was not able to pursue this claim on a class basis, obviating the need for any analysis of the class certification request.

Rest break class actions have been among the most difficult to certify, and this case is yet another example of the individualized questions that arise when considering how and why some employees do not take rest breaks. This decision also demonstrates the value of employers being able to amass substantial evidence of compliance with the laws allegedly violated as well as proof of idiosyncratic supervisors or varying conditions that destroy the ability of plaintiff to offer common proof.

This entry was written by Alison Hightower.

Photo credit: Steve Cash

The court analogized the defendant’s workweek construction in Seymore to the workday method that was struck down in In re Wal-Mart Stores, Inc. Wage and Hour Litigation. In that case, the court looked to the plain language of California Labor Code section 510(a), which states that “[e]ight hours of labor constitutes a day’s work,” and determined that the employer’s definition of a workday impermissibly split shifts which extended past midnight. Thus, “a shift of more than eight hours of consecutive work qualifies for overtime pay” unless a specific, enumerated exception applies.

Likewise, the Seymore court looked at the plain language of Labor Code sections 510 and 500 and determined that the defendant’s definition of a workweek was an attempt to circumvent the seventh day premium pay requirements. It found that, while an employer “may designate any workweek it wishes” it cannot “require its employees to work one workweek, such as from Tuesday noon to Tuesday noon, and designate another workweek, such as Monday to Sunday night, for the purposes of calculating overtime compensation.”

In light of the Seymore decision, employers should reexamine their workweek definitions and overtime compensation policies to confirm that their definitions and policies will not be construed as an “artifice designed to evade overtime laws.” Employers should also be cognizant of “artificial” workdays and overtime problems arising as a result of “split shifts” worked over more than one day.

This entry was written by Wayne A. Hersh and Heather M. Peck.

Photo credit: Pertusinas

The trial court found that Arechiga’s supervisor had satisfied all of the requirements necessary to have an enforceable wage agreement under cases which pre-dated the passage of section 515(d). Those six factors are: (1) the employee was told the days he would work each week (six); (2) the number of hours he would work each day (eleven); (3) the guaranteed salary of a specific amount that the employee would be paid ($880 per week); (4) the basic hourly rate upon which his salary was based (true); (5) that his salary covered both his regular and overtime hours (true); and (6) the agreement was reached before the work was performed (also true). See Espinoza v. Classic Pizza, Inc., 114 Cal. App. 4th 968, 974 (2003); Ghory v. Al-Lahham, 209 Cal. App. 3d 1487, 1491 (1989); Hernandez v. Mendoza, 199 Cal. App. 3d 721, 725 (1988); Alcala v. Western Ag Enterprises, 182 Cal. App. 3d 546, 550–51 (1986). Arechiga’s straight-time rate of $11.14 and overtime rate of $16.71 totaled $880 for the 40 straight-time and 26 overtime hours in each of his workweeks.

The surprise was that the Court of Appeal found the agreement between Arechiga and his employer trumped California Labor Code section 515(d). That section provides: “For the purpose of computing the overtime rate of compensation required to be paid to a nonexempt full-time salaried employee, the employee's regular hourly rate shall be 1/40th of the employee's weekly salary.” Section 515(d) is commonly thought to incorporate the “Skyline Homes” rule. Skyline Homes v. Dep’t of Industrial Relations, 165 Cal. App. 3d 239 (1985). Under Skyline Homes, the overtime that is due an employee who was only paid a salary is determined for most employees by dividing the salary by forty hours. One and one half times the result of dividing a salary by 40 must be paid for each overtime hour of work.

The Court of Appeal’s finding that the wage agreement survived the passage of section 515(d) was not the subject of extensive analysis. The court concluded that overtime may not be waived, but that the basic hourly rate on which overtime is to be paid is still subject to agreement between the parties. The court set aside the portion of the Labor Commissioner’s Enforcement Policies and Interpretations Manual which condemned agreements such as Arechiga’s because the Manual had not been promulgated in accordance with the Administrative Procedure Act.

While Arechiga v. Dolores Press may provide a measure of comfort for some employers, some of the unarticulated exceptions to the decision should be noted. A wage agreement may include some overtime, but, if an employee works more hours than are included in the agreement, additional overtime will be due. A wage agreement may appear generous or even beneficial to an employee if the full salary is provided even when the employee works fewer than the expected hours. However, a salary that guarantees a nonexempt employee overtime, even if the employee does not work the overtime, has to meet the requirements of the federal Fair Labor Standards Act for employers who are subject to the FLSA. 29 U.S.C. §§ 201 et seq. Under the FLSA, a salary that includes overtime, whether overtime was worked or not, is only valid if it meets all of the requirements of section 7(f) of the FLSA. Section 7(f) includes a requirement that an employee’s hours vary for reasons beyond the employer’s control and that the guarantee not include more than 60 hours per week. 29 U.S.C. § 207(f). Furthermore, the United States Department of Labor and some courts would say that a fluctuating hours agreement (called a Belo agreement) is only valid if an employee’s hours vary both above and below 40 in a week. 29 C.F.R. § 778.406. Whether Arechiga made any claim under the FLSA, whether his employer was covered by the FLSA and whether all of the requirements of a BELO agreement were met are not addressed in the California Court of Appeal’s opinion. And, whether Arechiga ever worked more or fewer hours than those in his agreed schedule is not noted in the court’s opinion. The odds of an employee indefinitely working the same hours day in and day out are, however, limited. Once the employee works more hours, additional overtime must be paid. Once an employee works fewer hours, the requirements of section 207(f) must be met or the employee’s salary must be docked. Even if the requirements of section 207(f) are met, there is no specific accommodation of such plans under California’s Labor Code.

In sum, the California Court of Appeal’s conclusion that Arechiga’s wage agreement was enforceable despite the seeming hurdle imposed by section 515(d) of the Labor Code is a surprise, albeit a welcome one. Any employer thinking of using such an agreement must, however, consider the more likely restrictions of federal law before concluding that all of the employer’s overtime concerns have been resolved.

This entry was written by R. Brian Dixon.

Photo credit: MBPhoto, Inc.

Starbucks initially demurred and moved to strike Price’s allegations related to his claim for improper wage statements under California Labor Code section 226. The demurrer was sustained, thereby dismissing Price’s claim on the basis that he had not alleged sufficient injury as required by the statute.

The Court of Appeal agreed, noting that in order to recover under section 226, “an employee must suffer injury as a result of a knowing and intentional failure by an employer to comply with the statute,” and the injury required by this section “cannot be satisfied simply if one of the nine itemized requirements in section 226, subdivision (a) is missing from a wage statement.” Citing, Jaimez v. Daiohs USA, Inc., 181 Cal. App. 4th 1286, 1306 (2010); see also Elliot v. Spherion Pacific Work, LLC, 572 F. Supp. 2d 1169, 1181 (C.D.Cal. 2008). Although Price alleged a “mathematical injury,” the court found that because no computations were required in order for him to analyze whether the wages paid in fact compensated him for all hours worked, such allegations were insufficient. Moreover, Price’s “speculation” regarding possible underpayment was, according to the Court of Appeal, not sufficient to state a section 226 claim.

Following the successful initial ruling, Starbucks also moved for summary judgment on the remaining claims, arguing that Price had been appropriately paid reporting time pay when he was provided with two hours of pay for the termination meeting and that all remaining claims were derivative of the reporting time pay claim. California’s Wage Orders provide:

Each workday an employee is required to report for work and does report, but is not put to work or is furnished less than half said employee’s usual or scheduled day’s work, the employee shall be paid for half the usual or scheduled day’s work, but in no event for less than two (2) hours nor more than four (4) hours, at the employee’s regular rate of pay, which shall not be less than the minimum wage. Cal. Wage Order 5-2001, Section 5(A) (2007).

Both the trial court and Court of Appeal agreed with Starbucks, holding that an employee who comes in for a meeting, as opposed to a regular work shift, is owed only two hours of pay at his or her regular rate. Thus, even though Price regularly worked more than four hours per shift, and thus may have been owed more pay if he had been sent home early on a regular workday, he had no expectation of working a full shift on the day he reported for the “talk.” Accordingly, only the minimum payment rules applied and Starbucks appropriately compensated Price for the meeting.

This entry was written by Michelle Heverly.

Photo credit: Matthew John Hollinshead

In affirming the trial court’s decision to deny class certification, the appellate court adopted the trial court’s reasoning. Noting that Labor Code section 226.7 states that “[n]o employer shall require any employee to work during any meal . . . period,” the court found that “a corollary to an employer’s obligation to ensure that its employees are free from its control for 30 minutes is the employer must not compel the employees to do any particular thing during that time – including, if employees so choose, not taking their meals.” Where the employer has a policy of making such meal periods available, and does not prevent its employees from taking those breaks, the court found the employer satisfied its legal obligation.

This decision provides employers with more hope that their obligation to “provide” meal breaks will be construed once and for all by the California Supreme Court to be limited—as the Tenet court found—to making such breaks “available,” without frustrating the employees’ ability to take breaks. While this decision is good news, employers cannot rest easy given that the state Supreme Court has accepted review of four other decisions addressing this very issue, including Brinker Restaurant Corp. v. Superior Court, but has yet to set oral argument in any of the cases. Further, the California Supreme Court recently denied review of another California court of appeal decision upholding certification of a class to resolve meal period claims. Given the lack of consistency in the various decisions, it remains to be seen how the California Supreme Court will ultimately resolve this issue.

This entry was written by Alison Hightower.
 

Relying on the “for each work day” language of the statute, employers have long argued that under California law, an employer is only obligated to pay a maximum of one premium payment per work day regardless of the number of missed meal and rest periods occurring on a given work day. Following the recent federal court decision in Marlo v. United Parcel Service, Inc., 2009 U.S. Dist. Lexis 41948 (C.D. Cal. May 5, 2009), the court however, disagreed.

In reaching its decision, the court looked to the language of the IWC Wage Orders, noting that the Wage Orders treat meal periods and rest periods in separate sections, and each section provides for an additional hour of pay per work day for the designated type of violation. The court reasoned that permitting the recovery of two premium payments under Section 226.7 would draw consistency between Section 226.7 and the applicable Wage Orders. The court further reasoned that allowing recovery of two premium payments per work day would further the intent behind Section 226.7 of providing “an incentive to employers to comply with labor standards and compensate employees when those standards are violated.”

While the ruling will likely be appealed, employers should evaluate their pay practices with respect to missed meal and rest periods to comply with the ruling until further authority is established.

This entry was written by Karin Cogbill.

Photo credit: skodonnell
 

Before the trial court, and again on appeal, the managers contended that Costco’s calculation of their regular rate of pay violated California Labor Code section 515, which requires an employee’s regular hourly rate to be 1/40th of the employee’s weekly salary. Specifically, the managers argued that Costco should have calculated their regular rate of pay based upon what Costco had listed as their “reported salary” on its internal personnel forms, an amount that included the overtime premium pay.

The court of appeal disagreed. Finding for Costco, the court held that Costco’s method of calculating the managers’ regular rate of pay did not violate California’s Labor Code. The court rejected the managers’ argument that Costco was bound by the designation of reported salary on its internal personnel forms, reasoning that after the reclassification, Costco was free to set the managers’ base salaries at any amount, subject to minimum wage laws. Given that the revised managers’ salaries already included an anticipated five hours of overtime per week at the premium rate, the court noted that, “To accept appellants’ position would mean ancillary managers after reclassification would be paid overtime upon overtime.” Although the court’s decision is unpublished, the decision reaffirms the notion that an employer has discretion in setting an employee’s base salary, so long as the salary meets minimum wage requirements. The decision also demonstrates that an employee’s regular rate of pay may be calculated based upon an employee’s weekly salary, and need not include amounts incorporated as overtime compensation.

This entry was written by Michele Babb.

Photo credit: Matthew John Hollinshead

The plaintiff alleged that the defendant’s failure to provide her with a seat in violation of Section 14 constituted a violation of Labor Code § 1198, which provides in relevant part that “The employment of any employee for longer hours than those fixed by the [Wage] order or under conditions of labor prohibited by the [Wage] order is unlawful.” The plaintiff alleged that because the defendant violated Section 1198, she was entitled to recover the PAGA civil penalties provided for by Labor Code § 2699(f). Labor Code § 2699(f) establishes a “default” civil penalty for violations of the Labor Code when a civil penalty has not otherwise been specifically provided for. The penalty provided for by Labor Code § 2699(f) is one hundred dollars ($100) for each aggrieved employee per pay period for the initial violation and two hundred dollars ($200) for each aggrieved employee per pay period for each subsequent violation.

On demurrer, the trial court ruled that a failure to provide suitable seats under Section 14(A) of the Wage Order does not constitute a violation of Labor Code § 1198 because such failure is not a condition of labor “prohibited” by the Wage Order. The trial court additionally held that even if a violation of the seats provision constituted a violation of Labor Code § 1198, the default penalties provided by Labor Code § 2699(f) were not recoverable by the plaintiff because Section 20 of the Wage Order already provided for civil penalties for all violations of the Wage Order, including Section 14. Section 20 of the Wage Order provides that in addition to any other civil penalties provided by law, any employer who violates the provisions of this order shall be subject to $50.00 for each underpaid employee for each pay period during which the employee was underpaid for an initial violation and $100.00 for each subsequent violation. Since the plaintiff did not allege she was underpaid, the trial court held she could not state a claim for relief and the demurrer was sustained without leave to amend.

Court of Appeal Reverses, Finding Suitable Seats Provision Enforceable Through PAGA

On appeal, the Second Appellate District, reversed the decision of the trial court in its entirety. First, the appellate court held that the “suitable seats” provision of the Wage Order is a condition of labor encompassed by Labor Code § 1198. Accordingly, the court found that Labor Code § 1198 renders unlawful violations of Wage Order 7-2001, Section 14.

Second, disagreeing with the trial court, the appellate court held that the penalties provided for by Section 20 of the Wage Order do not apply to violations of the suitable seats requirement, as such penalties relate solely to wage order violations for underpaid employees. Additionally, the court held that no provision of the Labor Code specifically provided a penalty for a violation of Labor Code § 1198. As such, the court concluded that Labor Code § 2699(f)’s civil penalties are available for a violation of Labor Code § 1198 premised on the failure to comply with Wage Order 7-2001, Section 14.

Harris v. Home Depot USA

In a case raising the same legal issues, plaintiffs Devon Harris and Lawrence Winston filed suit against their employer, Home Depot, alleging that as cashiers they were not provided with seats despite their allegation that the nature of the work they performed reasonably permitted the use of seats. On demurrer, Home Depot raised the same legal challenges that were addressed by the trial court in Bright. Home Depot’s demurrer was overruled, and it subsequently filed a petition for writ of mandate with the California Court of Appeal, Second Appellate Division. On July 30, 2010, the court of appeal issued an Order to Show Cause to the trial court as to why a peremptory writ of mandate should not issue ordering the trial court to vacate the order overruling Home Depot’s demurrer and to make a new and different order sustaining the demurrer without leave to amend. Oral argument is presently scheduled for December 10, 2010.

Going Forward

Although the appellate court in Bright has ruled that the plaintiff may legally continue to pursue her claim for PAGA penalties, the court offered no opinion as to what it means to provide employees with suitable seats and the circumstances under which such seats are required. Employers are encouraged to contact counsel with further inquiries and questions regarding the applicability of the Seats provision to their specific work environment.

This entry was written by Karin Cogbill.

Photo credit: tamergunal

Factual and Procedural Background

The plaintiff, Rogelio Hernandez, an hourly, nonexempt restaurant employee, brought a class action against the Chipotle fast food restaurant chain, charging that the company denied him meal and rest periods. Chipotle subsequently brought a motion to deny class certification, relying on written policies that require managers to provide all employees with meal and rest breaks. Chipotle also introduced evidence that it pays employees for the time they take breaks even though they are relieved of all duties and are free to leave the restaurant. Lastly, Chipotle submitted declarations from a number of employees who attested that they had received all meal and rest breaks, but occasionally had forgotten to record them.

Hernandez brought his own motion for class certification, offering declarations from a number of employees attesting that managers had denied or interrupted their breaks, to varying degrees. Hernandez also relied on a report submitted by his expert suggesting that missed breaks were widespread.

The trial court denied class certification, holding that although Hernandez had established the factors of numerosity, ascertainability of the class, typicality of Hernandez’s claims and adequacy of representation, he had failed to demonstrate that common issues predominated over individual issues; consequently, class treatment was not superior to individual actions. In reaching this conclusion, the trial court recognized the vacuum created by the California Supreme Court’s decision to review Brinker Restaurant Corporation v. Superior Court¹(pdf), but nonetheless concluded that the court was likely to decide that California employers are only required to provide employees with the ability to take breaks, not to ensure that breaks are actually taken. This appeal followed.

Court of Appeal Adopts ‘Provide’ Standard, Affirms Denial of Class Certification

Rather than shy away from the trial court’s embrace of the ‘provide’ standard, the court of appeal expressly affirmed the trial court’s analysis of the meal/rest period issue. It launched its own evaluation of the relevant statutes and regulations, concluding, as the trial court had, that “[i]t is an employer’s obligation to ensure that its employees are free from its control for thirty minutes, not to ensure that the employees do any particular thing during that time.”

In reaching this conclusion, the court limited the holding previously reached by another appellate court in Cicairos v. Summit Logistics, Inc. (pdf), 133 Cal. App. 4th 949 (2005), which some have argued had suggested that the “ensure” standard was the appropriate test. The court noted that the Division of Labor Standards Enforcement withdrew the opinion letter on which the Cicairos court based its analysis. Additionally, in Cicairos, the employer had established a system by which its driver employees were pressured to make a certain number of trips per today, a practice which effectively deprived drivers of the ability to take breaks. Hernandez could not point to any such practice implemented by Chipotle. “Thus,” the court concluded, “although the Supreme Court has yet to decide the issue, we hold that the trial court used the correct legal analysis with respect to meal breaks.”

Perhaps more importantly, the appellate court affirmed the trial court’s ability to address the legal issue, even in the vacuum created by the California Supreme Court’s review of Brinker. It noted that the California Supreme Court has not foreclosed trial courts from examining a legal issue at the class certification stage. Nor did another recent appellate decision, Jaimez v. Daiohs USA, Inc. (pdf), 181 Cal. App. 4th 1286 (2010), alter the trial court’s analysis. In Jaimez, the court determined that the defendant’s employment practices presented predominant common factual issues as to the plaintiff’s meal and rest break claims. In Hernandez, however, individual issues predominated. The court noted that some employees declared they always missed meal breaks, while others declared that they received meal breaks but not rest breaks. Still others declared that they were not denied meal breaks, while others simply declared their breaks were simply delayed. Hernandez himself had testified at deposition that he almost always was provided with breaks at one location where he worked, while managers at another location regularly denied him breaks.

Lastly, the court also seized upon the inherent unreliability of the punch data offered by Hernandez. Because Chipotle paid its employees for meal and rest breaks, there was no incentive for employees to accurately record their break time.

This fact, plus various logical flaws in the analysis conducted by Hernandez’s statistical expert, persuaded the court that individual issues predominated over common ones, thereby warranting a denial of class certification. As the court itself noted, “the evidence before the trial court suggested that in order to prove Chipotle violated break laws, Hernandez would have to present an analysis restaurant-by-restaurant, and perhaps supervisor-by-supervisor. Given the variances in the declarations, Hernandez did not demonstrate a common practice or policy.”

Court Certifies Opinion for Publication

The court injected further energy into the meal/rest period debate on October 28, 2010, when it issued an order certifying its opinion for publication. Consequently, it is currently citable and available as precedent.

This decision could have significant ramifications on meal period and rest break practices in California and employers are encouraged to speak to their employment counsel to discuss these issues in detail.

This entry was written by Ryan Eskin.

Photo credit: skodonnell

¹ On October 22, 2008, the California Supreme Court granted review of Brinker to address the proper interpretation of California statutes and regulations governing an employer's duty to provide meal and rest breaks to hourly workers.

Labor Code section 512 prohibits employers from requiring an employee to work more than five hours per day without providing a meal period, or ten hours per day without providing a second meal period.

AB 569, signed by Governor Schwarzenegger on September 30, 2010, creates a potential exemption from these requirements for commercial drivers and employees in the utilities, security and construction industries, instead allowing them to negotiate mutually agreeable meal period rules through the collective bargaining process.

The new law defines a “commercial driver” for purposes of the exemption as “an employee who operates a vehicle described in Section 260 or 462 of, or subdivision (b) of Section 15210 of, the Vehicle Code.”

Security guards are also exempted from the meal period requirements of Labor Code section 512. The exclusion applies to “[a]n employee employed in the security services industry as a security officer who is registered pursuant to Chapter 11.5 (commencing with Section 7580) of Division 3 of the Business and Professions Code, and who is employed by a private patrol operator registered pursuant to that chapter.”

The law similarly covers employees in a construction occupation, which includes work involving alteration, demolition, building, excavation, renovation, remodeling, maintenance, improvement, and repair, and any other similar or related occupation or trade. Finally, the law includes employees of electrical and gas corporations or local publicly owned electric utilities, as defined in Section 218 and 222 of the California Public Utilities Code.

Employees in these occupations/industries will fall within this new exemption if they meet the following requirements:

1. the employee is covered by a valid collective bargaining agreement;
2. his collective bargaining agreement expressly provides for wages, hours of work, working conditions, meal periods, final and binding arbitration of disputes concerning application of the CBA’s meal period provisions, and premium wage rates for all overtime hours worked; and
3. the employee’s regular hourly rate of pay of not less than 30 percent more than the state minimum wage rate (currently $10.40/hour based on a minimum wage of $8.00/hour).  

Assuming AB 569 goes into effect, California employers engaged in collective bargaining negotiations will be empowered to negotiate meal periods that fit the particular needs, demands and realities of their industry. The new statute also potentially puts a powerful tool in the hands of many unionized employers who have been swept up in the wave of litigation brought by unionized employees who claim meal period violations despite receiving meal periods that are consistent with their collective bargaining agreements. We can expect further litigation over the extent to which this new law affects ongoing litigation or cases extending back before the law becomes effective.

This entry was written by Kevin Lilly and Gregory Wong.

Image credit: skodonnell

Texas-based EGL, Inc. retained delivery drivers in California for its freight forwarding, custom brokerage, and pickup and delivery lines of business. The contract that these delivery drivers signed provided that the parties intended to form a vendor/vendee relationship and recited that “[n]either Contractor nor any of its employees or agents shall be considered to be employees” of EGL. The contract further stated that the drivers “shall exercise independent discretion and judgment to determine the method, manner and means of performance of its contractual obligations.” Either party could terminate the agreement on 30 days notice, but otherwise the contract was automatically renewed. The contract also provided that any dispute between the drivers and EGL was to be decided under Texas law.

Undeterred by this language, some drivers sued EGL in California, seeking to apply various California Labor Code provisions applicable to employees to obtain, among other benefits, overtime, expense reimbursement, and meal break premium pay. EGL relied on the choice of Texas law provision in its contract and argued the parties’ relationship should be construed in line with the stated intention in the contracts. The district court agreed and granted the motion for summary judgment.

On appeal, the Ninth Circuit rejected the choice of law argument. According to the Court, the drivers’ claims did not arise out of the contract, did not involve interpretation of the contract terms, or otherwise require that any contract exist at all. Instead, the drivers’ claims simply arose out of the California Labor Code. Therefore, California law governed the question of whether the drivers were employees, even though the contract said otherwise.

Applying California law, the Ninth Circuit concluded that the drivers clearly were employees, not independent contractors. Among other things, the Court stated that the company told drivers what deliveries to make and when to show up each day for work, and exercised control over their vacations as well as any passengers who might ride along with them. Further, the drivers did not appear to work for multiple clients, but rather worked exclusively for EGL. Moreover, EGL’s own manuals informed the drivers that they had “the key role in the shipping process” and were EGL’s “largest sales force” – representations that underscored their essential role in the regular business of EGL.

Although this ruling does not prevent EGL from marshalling other facts to prove its case at trial, it does demonstrate the challenges businesses face when attempting to establish an independent contractor relationship. While a strong contract remains essential, businesses must pay equal attention to the reality of the relationship they establish to be sure that independent contractors are being given the discretion and freedoms necessary to meet the law’s requirements.

This entry was written by Alison Hightower.