The “Next Wave” of Wage and Hour Cases

BASFLabor and Employment Law Section

2014 Yosemite Conference

Catha Worthman, Lewis, Feinberg, Lee, Renaker & Jackson, P.C.
Laura L. Ho, Goldstein, Borgen, Dardarian & Ho
Zachary P. Hutton, Paul Hastings LLP

  1. Emerging Issues
  2. Minimum Wage Pay Averaging
  3. “Every employer shall pay to each employee wages not less than [the minimum wage] for all hours worked.” Wage Orders, § 4(A).
  4. Armenta v. Osmose, 135 Cal. App. 4th 314 (2005).

Hourly employees worked off-the-clock.

“California’s labor statutes reflect a strong public policy in favor of full payment of wages for all hours worked. We conclude, therefore, that the FLSA model of averaging all hours worked ‘in any workweek’ to compute an employer’s minimum wage obligation under California law is inappropriate. The minimum wage standard applies to each hour worked by respondents for which they were not paid.”

  1. Balasanyan v. Nordstrom, Inc., 2012 U.S. Dist. LEXIS 181350 (S.D. Cal. Dec. 20, 2012).

“[Commissioned] employees must be directly compensated at least minimum wage for all time spent on activities that do not allow them to directly earn wages.”

  1. Gonzalez v. Downtown LA Motors, LP, 215 Cal. App. 4th 36 (2013).

“Averaging piece-rate wages over total hours worked results in underpayment of employee wages required ‘by contract’ under Labor Code section 223, as well as an improper collection of wages paid to an employee under Labor Code section 221.”

  1. Bluford v. Safeway, Inc., 216 Cal. App. 4th 864 (2013).

“[A] piece-rate compensation formula that does not compensate separately for rest periods does not comply with California minimum wage law.”

  1. The Regular Rate of Pay
  2. Both the FLSA and California law require employers to pay overtime based on a multiple of an employee’s “regular rate of pay.”
  3. Key characteristics
  • An Hourly Rate: The regular rate is an hourly rate. Therefore, even though employers have the right to pay non-exempt employees other than by the hour (e.g., by salary, by commission, and by piece), they must reduce all non-hourly forms of pay to an hourly rate for overtime calculations.
  • Unique to Each Workweek: The regular rate is an hourly rate that an employer must calculate workweek by workweek, not pay period by pay period.
  • Includes All Remuneration for Work. The regular rate includes all forms of compensation for time worked by non-exempt employees, including hourly earnings, salary, piecework earnings, commissions, on-call pay, standby pay, shift differentials, and bonuses, subject to eight statutory exclusions.
  • The regular rate does not include:
  • Sums paid as gifts; payments in the nature of gifts made at Christmas time or on other special occasions, as a reward for services, the amounts of which are not measured by or dependent on hours worked, production, or efficiency;
  • Payments made for occasional periods when no work is performed due to vacation, holiday, illness, failure of the employer to provide sufficient work, or other similar cause; reasonable payments for traveling expenses, or other expenses, incurred by an employee in the furtherance of his employer’s interests and properly reimbursable by the employer; and other similar payments to an employee which are not made as compensation for his hours of employment;
  • Discretionary bonuses and payments made pursuant to a “bona fide” profit-sharing plan or trust;
  • Contributions irrevocably made to a trustee or third person pursuant a bona fide plan for providing old-age, retirement, life, accident, or health insurance or similar benefits for employees;
  • Overtime premiums for hours in excess of 8 in a day, 40 in a week, or hours beyond employees’ normal working hours;
  • Extra compensation paid at a premium rate of at least 1 ½ times the employee’s normal rate of pay for work performed by the employee on Saturdays, Sundays, holidays, regular days of rest, or on the sixth or seventh day of the workweek;
  • Extra compensation paid at a premium rate of at least 1 ½ times the employee’s normal rate of pay, pursuant to a collective bargaining agreement, for work performed by the employee outside of the hours established in good faith by the contract as the basic, normal, or regular workday or workweek; and
  • Certain income derived from stock options, stock appreciation rights, and employee stock purchase programs.

29 U.S.C. § 207(e); 2002 D.L.S.E. Manual, § 49.1.2.4.

  1. Areas of Increased Litigation
  • Exclusion of “Discretionary Bonuses”

"[T]o qualify . . . as a discretionary bonus . . . the employer must retain discretion both as to the fact of payment and as to the amount until a time quite close to the end of the [bonus] period . . . The sum [must be] determined by the employer without prior promise or agreement. The employee has no contract right, express or implied, to any amount. If the employer promises in advance to pay a bonus, he has abandoned his discretion . . . .” 29 CFR § 778.211(b).

“Bonuses which are announced to employees to induce them to work more steadily or more rapidly or more efficiently or to remain with the firm are regarded as part of the regular rate of pay. Attendance bonuses, individual or group production bonuses, bonuses for quality and accuracy of work, bonuses contingent upon the employee's continuing in employment until the time the payment is to be made . . . are [included]." 29 CFR § 778.211(c).

  • Prizes or awards

General Rule: "All compensation (except statutory exclusions) paid by or on behalf of an employer to an employee as remuneration for employment must be included in the regular rate, whether paid in the form of cash or otherwise . . . .” 29 CFR § 778.330

Provine v. Office Depot, Inc., 2012 U.S. Dist. LEXIS 93881 (N.D. Cal. July 6, 2012).

  • Other “Perks”

Controulis v. Anheuser Busch, No. BC51818, Los Angeles Sup. Ct. (Cmplt. Filed Aug. 16, 2013).

  1. Time Rounding
  2. Under the FLSA, time rounding only is lawful if it “will not result, over a period of time, in failure to compensate the employees properly for all the time they have actually worked.” 29 CFR §785.48.
  3. The California Court of Appeal for the Fourth Appellate district adopted the federal standard in See’s Candy Shops v. Superior Court, 210 Cal. App. 4th 889 (2012), review denied Feb. 13, 2013. The rounding policy must be “fair and neutral on its face” and must be “used in such a manner that it will not result, over a period of time, in failure to compensate the employees properly for all the time they have actually worked.”

Policy for See’s Candy included rounding employee punch in/out times to the nearest one-tenth of an hour, and a “grace period” policy, which allowed employees to clock in up to 10 minutes before their scheduled start time and clock out up to 10 minutes after their scheduled end time.

Reversed San Diego County Superior Court order granting summary adjudication in favor of plaintiff on two of See’s Candy’s rounding affirmative defenses, which had found that the defenses were inconsistent with Cal. Lab. Code § 204’s requirement that all wages be paid every two weeks.

  • “[A]n employer’s rounding policy violates the DOL rounding regulation if it systematically undercompensate[s] employees [citation], such as where the defendant’s rounding policy “encompasses only rounding down.” See’s Candy Shops, 210 Cal. App. 4th at 902.

“In the absence of controlling or conflicting California law, California courts generally look to federal regulations under the FLSA for guidance.” Id. at 903.

  1. Other recent cases.

Leyva v. Medline Industries, Inc., 716 F.3d 510 (9th Cir. 2013) (in case involving warehouse workers, rounding violation alleged where company had practice of rounding to nearest half an hour, so worker who showed up at 7:31 would not be paid until 8:00. Ninth Circuit reversed denial of certification under Rule 23(b)(3)).

Ninth Circuit post-Comcast decision holding that “the presence of individualized damages cannot, by itself, defeat class certification under Rule 23(b)(3).” Leyva, 716 F.3d at 514.

  • Waine-Golston v. Time Warner, 2013 WL 1285535 (S.D. Cal.2013) (granting summary judgment on rounding claim where court did not credit plaintiffs’ expert).

Cummings v. Starbucks Co., 2013 WL 2096435 (C.D. Cal. May 14, 2013) (granting summary judgment for Starbucks based on rounding to nearest hundredth of an hour).

Abad v. Waste Connections, Inc., 2013 WL 1163982 (C.D. Cal. Mar. 20, 2013) (leave to amend granted for rounding claim alleging that rounding was used only to shave time off, and not to add time).

  1. Some cases seem to turn on expert evidence and merits at class certification.

E.g., Wright v. Menzies Aviation, Inc., 2013 WL 5978628 (Cal. Ct. App. Nov. 12, 2013), unpublished/noncitable, review filed (Dec. 23, 2013) (finding individual issues predominated where expert report, according to court, included “no evidence suggesting that Menzies’s rounding policy resulted in losses to the average employee over time.”

  1. Underfunding of Contracts, Labor Code § 2810
  2. Applies to agreements for labor or services with a construction, farm labor, garment, janitorial, security guard, or warehouse contractor.
    Cal. Lab. Code § 2810(a).
  3. Contractor may be liable if “knows or should know” that the contract is not sufficient to allow subcontractor to comply with “all applicable local, state, and federal laws or regulations governing the labor or services to be provided.” Id. § 2810(a).
  4. “Should know” includes “any additional facts or information that would make a reasonably prudent person undertake to inquire”Id. § 2810(i)(2).
  5. Employee must show injury as a result of a violation of a labor law or regulation in connection with the performance of the contract. Id.
    § 2810(g)(1).
  6. Remedies include the greater of actual damages or $250 per employee per violation for an initial violation and one thousand dollars $1,000 per employee for each subsequent violation, as well as injunctive relief, fees and costs. Id. § 2810(g)(1).
  7. Limited interpretive authority.

Castillo v. Toll Bros., Inc., 197 Cal. App. 4th 1172 (2011).

  • Minimum wage is to be used when evaluating the sufficiency of a contract.
  • Contracting party’s knowledge based on knowledge arising from familiarity with the normal facts and circumstances of the activity as well as any knowledge of the contracting party; knowledge measured at time of entering contract.
  • Workers not required to show causation, i.e. that violations were caused by underfunded contracts.
  • “[W]e find a causation requirement unnecessary in these circumstances. . . . As we have held, a contract is insufficient in this context only if it does not provide enough funds for an employer to comply with minimum standards in performing the contract. In other words, a contract is insufficient in this context only if legal compliance in the performance of the contract is, as a practical matter, impossible. Given such insufficiency, labor law violations are inevitable, and they can be traced directly to the insufficiency of the contract price.” Castillo, 197 Cal. App. 4th at 1209.

Hawkins v. TACA International Airlines, __ Cal. App. 4th __, 2014 WL 280301 (Jan. 27, 2014).

  • “[S]imply parroting the language of section 2810 in the complaint is insufficient to state a cause of action under the statute.” Hawkins, 2014 WL 280301 *7.
  • Original complaint against employer alleged that employer had the ability to pay all wages earned by security guard class members.
  • Once employer defaulted, plaintiffs added airlines as defendants under § 2810.
  • Undisputed that plaintiffs had not seen and had no information regarding contracts between employer and airlines.
  • Factual allegations of complaint were inconsistent were § 2810 violation.

Vasquez v. USM and Ross, 2014 WL 296939 (Jan. 27. 2014) (J. Alsup) (denying Ross’ motion to dismiss) and Vasquez v. USM and Ross, 2014 WL 492039 (Feb. 5, 2014) (denying Ross leave to file motion for reconsideration in light of Hawkins).

  • Plaintiffs included work orders, schedules, and subcontractor agreements showing Ross knew or should have known its contracts with USM were underfunded.
  • The court held that Hawkins, and Rojas v. Brinderson Constructors, Inc., 567 F. Supp. 2d 1205 (C.D. Cal. 2008), were distinguishable on their facts.
  1. Independent Contractor & Franchisor/Franchisee Status
  2. Independent Contractor Issues
  3. Background.

National and state level government enforcement efforts continue to focus on misclassification in connection with labor and employment law violations, lost tax revenues and benefits payments.

DOL has launched national “Employee Misclassification Initiative,” signed MOUs with IRS and 14 states including California. See

California: “The misclassification of workers results in a loss of payroll tax revenue to the State, estimated at $7 billion per year, and increased reliance on the public safety net by workers who are denied access to work-based protections.”

  1. Newish California Law (2011 SB 459).

Cal. Lab. Code §§ 226.8 and 2753 prohibit “willful misclassification” of an individual as an independent contractor, and also prohibits an employer from charging fees to a misclassified individual for items that an employee is not normally required to purchase, such as equipment, space rental, services, or licenses.

  • “Willful misclassification” is “avoiding employee status for an individual by voluntarily and knowingly misclassifying that individual as an independent contractor.” Lab. Code
    § 226.8(h)(4).

Penalties are between $5,000 and $15,000 for each violation, in addition to other penalties permitted by law. The penalty increases to between $10,000 and $25,000 per violation for pattern and practice violations.

Lab. Code § 2753 imposes joint and several liability on any person who, for money or other valuable consideration, knowingly advises an employer to treat an individual as an independent contractor simply to avoid the employee designation.

  1. Independent Contractor vs. Employees: Start with definition of “employer” under state and federal law.

The FLSA defines “employer” to include “any person acting directly or indirectly in the interest of an employer in relation to an employee.” 29 U.S.C. § 203(d). An employer “employs” someone if he “suffer[s] or permit[s]” the individual to work. Id. at
§ 203(g). The Supreme Court has referred to the FLSA’s definition of employment as “the broadest definition that has ever been included in any one act.” U.S. v. Rosenwasser, 323 U.S. 360, 363 n.3 (1945). This New Deal-era statement was reaffirmed in 1992 by the Supreme Court in Nationwide Mut’l Ins. Co. v. Darden, 503 U.S. 318, 326 (1992), which distinguished the FLSA from other employment law statutes by observing that the FLSA defines the employment relationship “expansively” and with a “striking breadth.”

California law even broader: Martinez v. Combs, 49 Cal.4th 35 (2010). An employer is any person who:

  • “directly or indirectly, or through an agent or any other person, employs or exercises control over a person’s wages, hours or working conditions”;
  • “suffers or permits” another to work; or
  • “engages” a worker, thereby creating a common law employment relationship.

Tests for employment status, as compared to independent contractor status, include the common law control or “right to control” standard (which California law expands upon), and the “economic realities” test, often used to evaluate employer status under the FLSA.

In S.G. Borello & Sons, Inc. v. Department of Industrial Relations, 48 Cal. 3d 341, 350 (1989), the Court stated, “California decisions . . . uniformly declare that ‘[t]he principal test of an employment relationship is whether the person to whom service is rendered has the right to control the manner and means of accomplishing the result desired.’”

  • It is the right to control, not the exercise of that right, that is determinative. Toyota Motor Sales U.S.A., Inc. v. Superior Court, 220 Cal. App. 3d 864, 875 (1990) (“[I]t is not the control actually exercised, but that which may be exercised which is determinative.”).
  • “[T]he courts have long recognized that the ‘control’ test, applied rigidly and in isolation, is often of little use in evaluating the infinite variety of service arrangements. While conceding that the right to control work details is the ‘most important’ or ‘most significant’ consideration, the authorities also endorse several ‘secondary’ indicia of the nature of a service relationship.” Borello, 48 Cal. 3d at 350.

Borello goes beyond the right to control to adopt the restatement factors, as well the “economic reality” tests adopted in an often-cited FLSA case, Real v. Driscoll Strawberry Associates Inc., 603 F.2d 748 (9th Cir. 1979).

Restatement 2d of Agency Factors:

  • Whether the one performing services is engaged in a distinct occupation or business;
  • The kind of occupation, with reference to whether, in the locality, the work is usually done under the direction of the principal or by a specialist without supervision;
  • The skill required in the particular occupation;
  • Whether the principal or the worker supplies the instrumentalities, tools, and the place of work for the person doing the work;
  • The length of time for which the services are to be performed;
  • The method of payment, whether by the time or by the job;
  • Whether or not the work is a part of the regular business of the principal; and
  • Whether or not the parties believe they are creating the relationship of employer-employee.

“Economic Reality” Factors:

  • The right to control work;
  • Alleged employee’s opportunity for profit or loss depending on his managerial skill;
  • The alleged employee’s investment in equipment or materials required for his task, or his employment of helpers;
  • Whether the service rendered requires a special skill;
  • The degree of permanence of the working relationship; and
  • Whether the service rendered is an integral part of the alleged employer’s business.
  • Pending questions on independent contractor issues.

Ayala v. Antelope Valley, No. S206874 (review granted Jan. 30, 2013), prior opinion at 210 Cal.App.4th 77 (2012), presents questions as to whether common issues predominate in a proposed class action focused on whether the putative class are independent contractors or employees.

The California Supreme Court asked for supplemental briefing, ordering on June 26, 2013 that:
“The parties are directed to submit simultaneous supplemental letter briefs discussing the relevance of Martinez v. Combs (2010) 49 Cal.4th 35, 52-57, 73, and IWC wage order No. 1-2001, subdivision 2(D)-(F) (Cal. Code Regs., tit. 8, § 11010, subd. 2(D)-(F)), to the issues in this case. (See also Sotelo v. Medianews Group, Inc. (2012) 207 Cal.App.4th 639, 660-662; Bradley v. Networkers Internat., LLC (2012) 211 Cal.App.4th 1129, 1146-1147.)” 2013 Cal. LEXIS 5522.

  • Bradley v. Networkers International, LLC, 211 Cal. App. 4th 1129, 1146-47 (2012) treated Borello and Martinez as separate standards for evaluating the employment relationship, and held that the evidence for establishing employee status for a group of telecommunications specialists was common to all class members under either standard.
  • Sotelo v. MediaNews Group, Inc., 207 Cal. App. 4th 639, 660-62 (2012) affirmed denial of class certification for a class of newspaper carries, holding that the trial court had erred in applying Borello’s common law test without the Martinez definitions, but that the error was harmless.
  • Franchisor/Franchisee Relationships
  • Franchisor/franchisee relationships are also attracting national and state-level attention in connection with wage and hour violations:

Department of Labor’s misclassification efforts include attention to franchisor/franchisee relationships.