Seyfarth Synopsis: With apologies to Dr. Seuss, we’ve penned an ode to the judicial chaos of the year just past, highlighted by three California Supreme Court decisions—Alvarado v. Dart Container Corp., Dynamex Operations v. Superior Court, and Troester v. Starbucks Corp.—all of which deviated from federal or common law norms to create more new cal-peculiar law that is friendly to plaintiffs and hostile to California business. Happy New Year!

The California Supremes, as we so often hear it,
rarely leave an employer in holiday spirit.

2018, alas, gave much more of the same,
placing employers behind in the game.

There were many new laws and decisions to weigh,
but here are just three to ruin management’s day:

At the beginning of March, to make business irate,
the Court changed how to figure the regular rate.

Flat-sum bonus calculation? Just tear it to shreds!
California proclaims, “We are not like the feds.”

Instead of dividing the bonus by all hours each week,
Just use the straight time, a division so bleak.

Important for employers seeking lawful abidance
is carefully following our regular-rate guidance.

The California Supremes continued their way,
wreaking more havoc just before May:

On April 30, Two Thousand Eighteen,
they continued their pro-plaintiff’s lawyer routine.

The Court issued a much anticipated decision,
inventing new law to some widespread derision.

Is one independent, or instead employee?
The Court says it’s simple as A, B, and C.

To be independent under wage order sections,
the worker must be free from control and directions.

Also a hirer must always enforce
that the work be beyond business’s usual course.

And also the work must be usually made
in some independent business or trade.

The decision is one we’re happy to share;
it should be considered with the utmost care.

Then in mid-summer, near end of July,
the California Supremes made still more of us cry.

In dissing a doctrine—de minimis time—
the Court found the federal law out of line:

Leeway for small stray time cannot be afforded
where high-tech can see that all time is recorded.

Advice that to us now seems rather quite sage
is to make sure all the work time is paid as a wage.

You have our best wishes this holiday season;
call us for advice for some employment-law reason.

For all who agree California law’s strange,
we will help in adopting all needed change.

Seyfarth Synopsis: The California Supreme Court heard oral arguments yesterday morning in Dynamex Operations v. Superior Court, a case addressing the legal standard for determining whether a worker should be classified as an independent contractor or an employee. We expect the Supreme Court’s opinion will be significant for any entity using independent contractors in California.

The Story Thus Far

As outlined in a previous blog article, the decision in Dynamex Operations v. Superior Court will be extremely important for all companies that use independent contractors, especially those in the emerging “gig economy.” Misclassifying workers can have painful consequences, involving not only liability for unpaid wages and employee benefits but also statutory penalties for each violation considered “willful.”

The Issue

In agreeing to review the case, the California Supreme Court defined the issue on appeal as to whether, in a misclassification case, a class may be certified based on the expansive definition of employee as outlined in the Wage Order language construed in Martinez v. Combs (2010), or on the basis of the common law test for employment set forth in S. G. Borello & Sons, Inc. v. Department of Industrial Relations (1989). In short, the Supreme Court focused on whether to continue using the Borello test and on what test, if any, to apply instead.

The definition of employment identified in the Wage Orders is broader than the prior common law test. The Wage Orders define “employ” broadly to mean “to engage, suffer or permit to work.” In contrast, Borello focuses instead on a multi-factor balancing test that depends on the unique facts of each situation and that is more likely to recognize the existence of an independent contracting relationship.

Oral Argument

Dynamex Operations Goes First

In its opening argument, Dynamex praised the Borello test as a tried and true California rule and warned against the danger that uncertainty in the classification of workers would pose to California’s booming “gig economy.” Dynamex raised concerns with any judicial adjustment to the definition of employment that would usurp the legislature role.

Justice Kruger, however, wondered whether judicial adoption of a bright-line rule would not be more instructive for employers, and suggested, as a possibility, adopting the ABC test followed in such jurisdictions as New Jersey and Massachusetts. The ABC test says that three conditions must all concur for a worker to be an independent contractor: (1) freedom from actual control over the work, (2) work beyond the usual course of business and off company premises, and (3) engaging in an independent trade. Unless A, B, and C all concur, then the worker is an employee.

Chief Justice Cantil-Sakauye raised an additional response to Dyanamex’s plea to leave this issue to the Legislature: if the ABC test is a stricter version of the Borello test, then why should the Supreme Court be precluded from adopting a new version of the test to ensure clarity in enforcement when, after all, it was the Supreme Court that had adopted the Borello test in the first place? Finally, Justice Kruger and Dynamex had a robust discussion about adopting a modified rule, where the ABC test would govern for some Labor Code provisions, but a different test may apply to others. Dynamex opined that this result would be confusing for employers and might result in individuals being employees for some purposes but independent contractors for others.

Aggrieved Independent Contractors Respond

In their responsive argument, the workers portrayed what they saw as the sorry plight of California independent contractors. The workers called independent contracts the new “serf-class”: people who work hard while receiving none of the Labor Code’s basic employee benefits. They argued that the Supreme Court should adopt a new, broader definition of employee to protect workers from harm. The workers seemed open to several outcomes, including (a) a broader definition for some Labor Code provisions, (b) the definition outlined in the Wage Orders, or (c) any other new employment test  that the Supreme Court might come to favor.

Justice Liu seemed skeptical about a broader test. He referred to an “Amazon Analogy.” Although most people know Amazon sells goods online, many people also view Amazon Prime (with its delivery services) as within Amazon’s usual course of business. Justice Liu then asked: if the Supreme Court were to adopt a strict interpretation of the ABC test, at what point would Amazon be considered a shipping business, meaning that all drivers who ship Amazon Prime goods would be employees of Amazon under the second ABC prong? This analogy caught the attention of Justices Cuellar and Justice Chin, who both seemed to appreciate how complicated, and blurry, a new test could be.

Dynamex Makes A (Brief) Comeback

In its rebuttal, Dynamex took up Justice Liu’s “Amazon Analogy” to argue why a flexible test is needed to ensure just results. Two Justices followed up. The first was Justice Liu, who asked whether other jurisdictions have applied the ABC prongs strictly. The second was Justice Chin, who closed oral argument with a pointed question that represents the concerns of many observers: which employment test best fits the modern economy? Dynamex responded that the body of developing case law as well as the uniformity of Borello’s application has suited California well and that it provides all of the factors needed to fully determine employment relationships.

Our Crystal Ball

Although one cannot read the minds of seven justices, we sense the Supreme Court will likely reject the call to leave this matter for the Legislature and will lean instead toward a judicially fashioned test that, in the view of most justices, will best fit the needs of the modern economy. The Supreme Court’s decision is expected within the next 90 days.

As always, we will remain vigilant and on the scene. Look for more updates about this case as they come out and in the meantime do not hesitate to reach out to your friendly neighborhood Seyfarth attorney for guidance or with any questions you might have.

Seyfarth Synopsis: In what many employers will see as a “break” from workplace reality, the Supreme Court, in Augustus v. ABM Security Services, Inc., announced that certain “on call” rest periods do not comply with the California Labor Code and Wage Orders. The decision presents significant practical challenges for employers in industries where employees must respond to exigent circumstances.

On December 23, 2016, the California Supreme Court issued its long-anticipated decision in Augustus v. ABM Security Services, Inc., affirming a $90 million judgment for the plaintiff class of security guards on their rest break claim. The Supreme Court found that the security guards’ rest breaks did not comply with the California Labor Code and Wage Orders, because the guards had to carry radios or pagers during their rest breaks and had to respond if required.

The Supreme Court took a very restrictive view of California’s rest break requirements, concluding that “one cannot square the practice of compelling employees to remain at the ready, tethered by time and policy to particular locations or communications devices, with the requirement to relieve employees of all work duties and employer control during 10-minute rest breaks.” Thus, in the Supreme Court’s view, an employers may not require employees to remain on call—“at the ready and capable of being summoned to action”—during rest breaks.

See our One Minute Memo for more details on the decision and thoughts on the implications of this case for California employers. The Augustus decision presents significant practical challenges for employers, especially in industries in which employees must be able to respond to exigent circumstances.

Workplace Solution:

The holding that “on call” rest periods are not legally permissible should prompt employers to evaluate their rest-break practices. In industries where employees must remain on call during rest periods, employers should consider seeking an exemption from the Division of Labor Standards Enforcement. Lawyers in the Seyfarth California Workplace Solutions group can assist with other suggestions for responding to this decision.

Seyfarth Synopsis: Travel time pay is a nebulous area of the law that can leave many employers stalled on the starting blocks. Here are some guidelines to help ensure that employees get paid for all hours worked, including any compensable travel time.

Ready. Set. Not so fast.

It makes common sense to most people that commute time—the time an employee travels between home and work and back again—need not be paid. But at what point does an employee’s time on the road become compensable?

What travel time counts as hours worked?

The answer depends on whether travel time is “hours worked.” California Wage Orders define “hours worked” as the time during which an employee is (a) subject to the employer’s control or (b) the employee is suffered or permitted to work, whether or not required to do so. If travel time falls under either category, the employer must pay for the time spent traveling.

A few points of note:

  • A potential exception to the no-pay-for-commuting rule exists when employees carry business-related tools or materials in their car to a worksite or work meeting. A recent California court held that where employees can use a vehicle for personal purposes during the commute, and are not required to drive a particular route, they are not subject to control of the employer even if they are transporting tools. But the DLSE opines that if an employee must deliver equipment or goods to the worksite for the employer, the travel time is compensable.
  • Labor Code section 2802 requires employers to reimburse employees for automobile costs (mileage, wear and tear, etc.) the employee incurs when being required to use a car for work. So while normal commute expenses are not reimbursable, expenses required beyond the reasonable commute require reimbursement. The DLSE has stated that paying the IRS mileage rate (currently $0.54 per mile) is a “presumptively reasonable” reimbursement rate.
  • Check out our prior blog post on travel time issues here, for more detail regarding compensation for travel time during the workday versus overnight travel out of town.

Getting the Green Light.

So we’ve reached the finish line, right? Hold your horses. Determining what constitutes travel time is a fact-sensitive inquiry that may not be all that simple to analyze in all circumstances. Here are some scenarios where drive time has been found to be compensable:

  • If an employee must attend an offsite conference or meeting, the time spent traveling to and from the meeting in excess of the employee’s normal commute is compensable.
  • Any time spent in reaching the airport or train station that is over and above the time spent in the employee’s normal commute is compensable.
  • Travel to a remote work site from an employee’s home may be compensable if the time spent goes beyond the employee’s normal commute.
  • Once an employee reports to work, any work-related travel during the day is compensable. The same goes for time traveling for a special assignment or emergency outside of regular hours.

Finally, remember that California requires employers to record all hours worked, including travel time. And because any time spent traveling is compensable, all compensable travel time in California counts toward the number of hours worked in calculating any required overtime premium pay.

Keep in mind that employers may establish a separate rate for travel, as long as it does not fall below the minimum wage, and as long as the employee is notified of the travel rate in advance.

Workplace Solution:  California employers must implement a clear travel policy to ensure compliance with this tricky area of the law. If you have any questions or need assistance drafting such a policy, please feel free to contact any of our attorneys.

Edited by Coby M. Turner.

(with apologies to the song artist)

Seyfarth Synopsis: The Ninth Circuit has suggested it might upset longstanding “on call” practices by making California employers liable for “reporting time” pay to employees who phone in ahead of their schedule, only to find that they are not needed for the day.

On October 5, 2016, a Ninth Circuit panel indicated that it might call on the California Supreme Court to answer whether “calling in” to work amounts to “reporting for work” under California’s Wage Order 7-2001. The panel, in Case No. 15-56162 (9th Cir.), considered an interlocutory appeal from a decision by federal district court judge George H. Wu in the case Casas v. Victoria’s Secret Stores, LLC, CV 14-6412 (C.D. Cal).

Casas involves an on-call scheduling practice common among retailers: “on-call” employees call in a few hours before the scheduled start time to see if they need to appear for work.  Plaintiffs argued that this required act of picking up the phone amounts to “reporting” for work under Wage Order 7’s Reporting Time Pay provision. To Plaintiffs, this means that employers who fail to use call-in employees must pay reporting-time pay (subject to some exceptions). The rules on reporting pay generally provide that an employee who reports for work, but who is not put to work or is furnished less than one-half the usual or scheduled day’s work, is entitled to at least two hours and up to four hours of reporting-time pay.

In December 2014, Judge Wu rejected this “call-in” claim. Judge Wu relied on both the common meaning of “report” and the legislative history of Wage Order 7 to hold that to “report for work” plainly means to physically appear at the work site. Thus, contrary to Plaintiffs, simply lifting a receiver or tapping a touchscreen does not require the employer to pay reporting time when the on-call employee never actually shows up for work.

The Plaintiffs took an interlocutory appeal to the Ninth Circuit.

Will the Ninth Circuit put the call on hold? At oral argument, a panel of Ninth Circuit judges indicated that the panel might, for all practical purposes, place Judge Wu’s decision on hold. Pregerson, Noonan, and Paez—the three circuit court judges who took the line from Judge Wu—expressed skepticism that federal court is the appropriate venue to decide the on-call issue. Both Judges Paez and Pregerson repeatedly suggested transferring the call to the California Supreme Court. Judge Paez went so far as to iterate the statutory certification standard—that federal courts should certify important questions of state law to the state supreme court—and concluded that “this in my view, it seems to me, like a very important question that affects a lot of people.” These statements suggest that it is possible, if not likely, that the panel will call on the California Supreme Court for its guidance as to what California law is on this topic.

But will the Supreme Court accept a transfer? As Judge Paez recognized, even though the Ninth Circuit might put in a call for help, nothing requires the California Supreme Court to answer. Nonetheless, Judge Paez seems confident the Supreme Court will take the call since it has accepted other related employment cases from the Ninth Circuit in the past (including, for example, Oracle and Kilby).

Legislatures, could you help them place the call? Regardless of the Ninth Circuit’s actions, the switchboards of legislative bodies could light up in the coming year with calls to regulate on-call scheduling. As reported in this blog, just last year San Francisco became the first jurisdiction to penalize employers for not using employees scheduled for “on-call” shifts. Under the so-called Workers Bill of Rights, when employers require employees to be available for work but do not actually engage the employee, employers must pay the employee between two and four hours of pay, depending on the duration of the on-call shift.

The California Legislature considered similar legislation in its most recent session. Like the San Francisco ordinance, subject to certain exceptions, it would have required employers to pay on-call employees who were not ultimately called in to work their shifts.  The legislation did not pass,  but it seems likely that the legislative initiatives—at both the municipal and state level—will not end the matter.

Call me (call me) on the line, Call me (call me) any, anytime. The bottom line is that at least for now, Judge Wu’s well-reasoned decision is good law. But be sure to dial up this blog in the coming months to see if that number remains in good working order. We’ll be holding on the line to monitor the messages that courts and legislative bodies leave for employers wishing to continue the time-honored tradition of on-call scheduling.

Seyfarth Synopsis: California’s rules on rest breaks are still developing. Recent cases have addressed the timing of rest breaks, and whether employees (particularly those who remain “on call”) must be relieved of all duty during breaks.

Our fair state has long imposed peculiar—and specific—requirements for employee work breaks. Varying interpretations of the rules for meal and rest breaks have spawned prodigious class action litigation, both before and after the California Supreme Court’s crucial 2012 decision in Brinker Restaurant Corp. v. Superior Court. Accordingly, California employers have a keen interest in making their break policies and practices as compliant as possible.

But this can be hard to do while the rules remain in flux. In this post, we discuss two cases—one decided a few months ago and the other now pending before the California Supreme Court—that bring the requirements for rest breaks into finer focus. The cases raise these questions: (1) Exactly when must employers provide rest breaks? (2) Can employers require workers on break to remain “on call”?

So we invite you to “take 10” and read on.

The Basic Rule

Section 226.7 of the Labor Code says that employers can’t require employees to work during breaks mandated by an order of the Industrial Welfare Commission. The IWC, in turn, has mandated (in Section 12(A) of the Wage Orders) that:

Every employer shall authorize and permit all employees to take rest periods, which insofar as practicable shall be in the middle of each work period. The authorized rest period time shall be based on the total hours worked daily at the rate of ten (10) minutes net rest time per four (4) hours or major fraction thereof.

More about that pesky phrase “insofar as practicable,” below.

Timing of Rest Breaks

The rule on rest breaks is often short-handed as “10 minutes paid rest for every four hours (or major fraction thereof) worked.” But must each rest break occur during the middle of each four-hour work period? Or can it be permissible to allow—or require—employees to combine breaks, or to schedule them at some time other than midway through the work period? And what does “insofar as practicable” mean, anyhow?

The 2016 California Court of Appeal decision in Rodriguez v. E.M.E., Inc. took a stab at answering. E.M.E. gave one 20-minute rest break and one meal break per eight-hour shift, due to the nature of the work and the clean-up time required at each break. Rodriguez brought a class action claiming that this practice violated Section 12(A) of the applicable Wage Order.

The Court of Appeal held that the phrase “insofar as practicable” means that employers must implement the rest schedule specified in the Wage Orders unless there is “an adequate justification why such a schedule is not capable of being put into practice, or is not feasible as a practical schedule.” More specifically, employers may depart from the Wage Order schedule (i.e., a rest break in the middle of each four-hour period or major fraction thereof) only when it (1) will “not unduly affect employee welfare” and (2) “is tailored to alleviate a material burden” on the employer that would result from using the Wage Order schedule.

Reversing summary judgment for the employer on the certified rest break claim, the Court of Appeal sent the case back to the trial court to resolve triable issues about these questions. The court highlighted two issues: (1) Was the nature of the work (i.e., sanding, painting and finishing metal parts for the aerospace industry) such that it took 10 minutes to prepare for each break and 10 minutes to ramp up again after the break? (2) Did the employees actually prefer to receive one combined 20-minute break? If E.M.E. could establish these points, then E.M.E. could use a schedule other than the one specified by the Wage Order.

Relief From All Work?

Poised for decision by the California Supreme Court in Augustus v. ABM Security Services, Inc., 233 Cal. App. 4th 1065 (2014) review granted, 186 Cal. Rptr. 3rd 359 (2015), is the question whether an employee on a rest break must be relieved of all duties, even the duty to be on call. The employees at issue in Augustus were security guards who remained “on call” even while taking their rest breaks. The guards claimed that their “on call” status deprived them of legally compliant rest breaks. The trial court agreed and granted them summary judgment.

But then, in a refreshing display of common sense, the Court of Appeal reversed, holding that on-call rest breaks are permissible. The Court of Appeal explained that although on-call hours constitute “hours worked,” an employee who is merely available to work is not actually working. Section 226.7 proscribes only work on a rest break; being on call is a compensable activity, but it is not work. This result is consistent with the point that employers may require employees on a rest break to stay on the employer’s premises because the breaks are, after all, paid. The issue of whether a rest period is compensable time (it is) is not the same as whether a rest period is a true break from work (on-call duty, when one is not called, is not work).

Yet employer hopes that the Court of Appeal had the final say on this matter were dashed when the California Supreme Court granted review of the decision. Check this space after the oral argument on this case, scheduled for September 29, 2016, to read our take on how the Supreme Court may be leaning when it comes to the issues presented in this case.

Workplace Solution

Even after Brinker, the waters continue to roil around rest break rules. We welcome your inquiries regarding any Cal-peculiar issues of employment law.

With March Madness in full swing, we interrupt your crumbling tournament brackets to ensure you’re aware of a truly maddening development. California law now makes individuals potentially liable for employer violations of many often-convoluted wage and hour rules.

That’s right—individuals, not just companies, may be liable for wage and hour violations.

We mentioned this legislation here last Fall, when it was part of “A Fair Day’s Pay Act” (SB 588).  We described it there as what it is: an enhancement to the Labor Commissioner’s enforcement authority. The bill’s introductory summary explained that the “bill would authorize the Labor Commissioner to provide for a hearing to recover civil penalties against any employer or other person acting on behalf of an employer … for a [wage and hour] violation.” The Senate Bill Analysis opined that the bill targeted “willful” wage theft and would give the “Labor Commissioner” additional avenues to enforce its judgments. The Senate Bill Analysis can be found here, and the full text of the bill can be found here.

Even though the limited purpose of the new law is clear, enterprising members of the plaintiffs’ bar have recently sought to read the new law as authorizing a private right of action against individual managers. These lawyers have seized upon a legislative oversight. Although 12 of the 13 bill’s enactments refer to the Labor Commissioner, the 13th provision—Section 558.1 of the Labor Code—does not expressly mention “Labor Commissioner.” These lawyers have seized upon this obvious oversight to argue that Section 558.1 goes further than its 12 companion provisions and somehow creates a private right of action against individuals.

The personal liability language of Section 558.1 is not complex: any employer or “other person acting on behalf of an employer” “may be held liable as the employer for” violations of the directives in the Wage Orders and in various provisions of the Labor Code. Thus, the Labor Commissioner may now hold individuals liable for certain wage and hour violations, including California’s big six: unpaid overtime, unpaid minimum wage, denied meal/rest breaks, untimely termination pay, inadequate wage statements, and failure to reimburse for employee business expenses.

The Legislature defines “other person acting on behalf of an employer” as “a natural person who is an owner, director, officer, or managing agent of the employer.” The “managing agent” definition mirrors that found in California’s punitive damages statute. Under that statute and case law, “managing agents” are all employees who exercise substantial independent authority and judgment in their corporate decision-making such that their decisions ultimately determine corporate policy.

But while this statutory language thus creates the potential for individual liability at the hands of the Labor Commissioner, none of the foregoing statutory language nor anything in the legislative history of the bill’s enactment creates a private right of action. As the California Supreme Court has explained, it takes more than statutory silence in a Labor Code provision to create a private right of action: the statute must contain “clear, understandable, unmistakable terms, which strongly and directly indicate that the Legislature intended to create a private cause of action”; and if the statute lacks that language, the statute’s legislative history must be examined. Applied here, that analysis would show that the plaintiffs’ lawyers are out of line, and should seek their easy pickings elsewhere.

We expect courts to remedy the plaintiffs’ interpretive overreaching. Meanwhile, however, the new statute remains significant for high-level managers regardless of who is empowered to enforce it. What’s clear is that now, more than ever, employers and their corporate policy-makers may have a personal stake in ensuring that the company’s wage and hour house is in order and ensuring that employees are paid properly. Employers would be well-advised to take proactive measures to ensure compliance with California’s unique wage and hour landscape, such as auditing current pay practices and policies.

If you would like assistance in ensuring your company’s wage and hour compliance, or if have questions regarding the issues raised in this post, then please do not hesitate to contact the authors or any other member of Seyfarth’s Labor and Employment Group.

Girl in black suit takes stool up.The countdown begins to receiving some clarity on the suitable seating rule from the California Supreme Court. On January 5, 2016, the Court heard oral argument in the consolidated matters of Kilby v. CVS Pharmacy, Inc. and Henderson v. JP Morgan Chase Bank. These putative class actions claim that the employers violated Section 14 of Wage Orders 4-2001 and 7-2001 (the “suitable seating” rule), providing that “[a]ll working employees shall be provided with suitable seats when the nature of the work reasonably permits the use of the seats.” In the present proceedings, the Court is responding to a question certified by the Ninth Circuit for guidance on the meaning of the rule.

CVS and JPMorgan both argued for a “holistic approach” in which the factfinder should assess the nature of employees’ work by looking at the whole range of tasks they perform, the workplace’s layout and other factors, including the employer’s business judgment in requiring employees to stand to deliver the expected level of customer service.

In contrast, the employees argued for a task-oriented approach, and contended that if the tasks they are required to undertake can be done sitting down, then they should be provided seats. They also argued that an employer’s business judgment should never be taken into account. According to the employees, the suitable seating rule conveys a minimum labor standard, like meal and rest breaks, that cannot be compromised based on perceived customer preferences and expectations for a standing employee.

Questions from the justices  indicated that some were not wholly sold on either side’s argument. Although statements by Justice Goodwin Liu suggested that CVS and JPMorgan’s proposed approach was not unreasonable, others asked whether the holistic approach would contemplate any circumstance where an employee would be entitled to sit. Overall, the Court appeared concerned that if a holistic approach were adopted in applying the suitable seating rule, then there would never be a situation where an employee would be entitled to sit, because an employer’s business judgment would always weigh in favor of making the employee stand.

The Court also took issue with the employees’ contention that an employer’s business judgment should not be considered at all. Justice Liu questioned whether the use of the term “reasonably” necessarily requires consideration of an employer’s business judgment. A few comments indicate that some justices think employers are in the best position to determine what works for their business and whether the nature of the work permits the use of seats.

The Court has 90 days to issue its decision. Based on the questioning, it is difficult to say whether the decision will be a slam dunk win for either side. Will the Court adopt the holistic approach advocated by CVS and JPMorgan, write off the business judgment of an employer, as advocated by the employees, or come up with a different interpretation altogether?  Stay tuned to this space for further analysis when the decision comes down.

By: Emily Schroeder 

In a recent blog post, we discussed how recent California judicial court decisions may erode the once-solid foundation of traditional incentive pay systems. Specifically, Armenta v. Osmose and Bluford v. Safeway held that while a piece rate compensated employees for their “productive time”—time spent actually working on piece-rate tasks—the piece rate did not compensate them for their “non-productive time”—time worked doing anything else.

The California Supreme Court has added to this line of cases in Peabody v. Time Warner Cable, Inc., where the timing of commission payments came under attack. In Peabody, the Supreme Court held that commission wages paid in one pay period cannot be attributed to earlier pay periods to satisfy minimum and overtime wage requirements.

The Pay Practice

The Plaintiff, Susan Peabody, worked for Time Warner as a commissioned sales person. She was paid biweekly, but only the final paycheck of the month contained her commissions. Her first paycheck, meanwhile, generally paid an hourly rate of less than 1.5 times the minimum wage for the hours worked during the pay period corresponding to that paycheck. 

Peabody filed a class action lawsuit against Time Warner, claiming that (1) she regularly worked overtime but did not receive overtime wages, and (2) she earned less than the minimum wage during those weeks in which she worked more than 48 hours.

Time Warner argued that (1) Peabody was exempt from overtime pay under the California Wage Order exemption for commissioned employees whose earnings exceed 1.5 times the California minimum wage and who earn more than one-half of their compensation in the form of commissions, and (2) Time Warner should be able to assign the commissions paid in one pay period to the earlier pay period to satisfy minimum and overtime wage requirements. 

The California Supreme Court Decision

When a federal district court court granted summary judgment for Time Warner, Peabody appealed to the Ninth Circuit. The Ninth Circuit, finding no controlling California precedent, asked the California Supreme Court to determine whether the timing of Peabody’s commission payments resulted in underpayment of minimum and overtime wages.

As an initial matter, the Supreme Court rejected Time Warner’s argument that it was permissible to use a monthly pay period for paying commissions; the Court reasoned that, except for employees subject to certain special exemptions, wages must be paid at least as often as semi-montly. Second, the Suprme Court held that commissions paid in one pay period could not be attributed to earlier pay periods to satisfy minimum and overtime wage requirements. The Supreme Court cited statutory construction principles that require it to construe statutes in a manner favorable to the employee.

Additionally, the Supreme Court cautioned employers against relying on federal law in establishing pay practices, as California law is often significantly more favorable to employees.

Workforce Solutions

In the wake of Peabody, employers with commissioned employees may want to review their current payroll practices to ensure that these employees are paid more than 1.5 times the California minimum wage during each pay period, to take advantage of the Wage Order overtime exemption for commissioned salespeople.  Peabody is also a further reminder that California employment law is peculiar: California employers should always be wary of the differences between federal and state law when establishing pay policies.

Edited by Julie Yap

By Mark Grajski and Maya Harel

In theory, the California Labor Code and the Wage Orders allow employers the freedom to do what employers traditionally have done: pay employees solely with commissions or solely with piece rates. This idea of incentive pay—you reap what you sow— has been around a long time!

But a wave of California judicial court decisions has eroded the once-solid foundations of traditional incentive pay systems. In response, employers have been moving towards complicated hybrid compensation systems.

So what do you need to know when deciding to use one of these incentive or hybrid compensation systems?

Beware: Averaging Earnings Over the Pay Period Is Not Allowed to Satisfy Minimum Wage

Federal law allows employers to average wages over a pay period to meet minimum wage requirements (dividing total compensation by total number of hours worked). California does not. Courts have read California’s minimum wage statute to require employers to pay the minimum wage separately for each hour worked.

The tension between this requirement and traditional commission and piece-rate pay systems became apparent in 2005 in the California Court of Appeal decision in Armenta v. Osmose. In Armenta, employees earned their pay solely through piece rates. The Armenta court held that while the piece rate compensated employees for their “productive time”—time spent actually working on piece-rate tasks—the piece rate did not compensate them for their “non-productive time”—time spent doing anything else.

  • What Kinds of Pay Systems Have Employers Used In Response, and Do They Pass Legal Muster?

In an attempt to comply with Armenta, many employers created complicated hybrid hourly and incentive compensation systems. Unfortunately, even these laudable efforts to comply with California law may still expose well-intentioned employers to liability.

For example, in Bluford v. Safeway, the employer paid its truck drivers a certain figure to each mile driven, a piece rate for certain non-driving tasks, an hourly rate for other tasks, and a different hourly rate for unexpected driving delays. Even so, an unsympathetic Court of Appeal held that Safeway’s system violated the Wage Order because the system did not provide separately for an hourly rate for rest breaks, which the Wage Order designates as “hours worked.”