Wage and Hour Red Flags

Second, over the past several years, the number of individual wage and hour claims has risen dramatically. (The latest reported data from the DLSE indicates that for the year 2012, it assessed a total of $161 million in unpaid wages and penalties, and minimum wage and overtime wage violations.) The Labor Commission has been more aggressive both in expediting hearings on individual wage claims brought by employees, and in increasing its own enforcement and investigative activities, such as unannounced spot audits, citation hearings, and lawsuits. Third, class actions have also been proliferating, striking fear among employers served with such a complaint. Such collective actions, which can range from several dozen to several thousand plaintiff employees, are frequently described as “bet the company” litigation, with good reason. Employers frequently face the unenviable Hobson's choice of either settling up front by paying a huge amount to class counsel and their clients, or litigating, thereby incurring huge defense costs and fees, plus the risk of losing even a bigger judgment at the end of years of trial and appeal.

Finally, these cases tend to be “labor intensive,” i.e. , requiring a lot of attorney time. The relevant law, both state and federal, has many moving parts: 1) the California Labor Code; 2) the 18 Wage Orders published by the Industrial Welfare Commission, covering different industries, occupations and minimum wage rules; 3) opinion letters of the Division of Labor Standard Enforcement, (DLSE) (commonly referred to as the Labor Commissioner); 4) the DLSE's administrative regulations; 5) federal law, including the Fair Labor Standards Act (FLSA) 29 USC ” 201-219, and its implementing administrative regulations; and 6) myriad state and federal court decisions interpreting the above laws. Employers must comply with both state and federal laws if they engage in interstate commerce or the production of goods used in interstate commerce. Wending your way through this legal thicket is not for the faint of heart.

Confronting a Claim

When confronted with a wage and hour claim, an “ostrich” approach by employers usually leads to a bad outcome. Ignoring known or suspected violations or informal complaints by employees is, inevitably, a poor strategy at best. At the other extreme, automatically “circling the wagons” and choosing to fight all claims “to the death” irrespective of the merits of an individual claim in order to deter future suits can also lead to disastrous results. While such litigation is sometimes unavoidable, the vast majority of wage and hour claims can usually be settled at a fraction of the total cost to the employers if both sides objectively and in good faith assess the risks and expenses of litigation.

While settlement is usually better than costly litigation, avoiding such claims in the first instance is even better. So, what are the major wage and hour red flags to avoid? In the author's experience, the following list, while not all inclusive, highlights the most frequently litigated claims:

1. Hiring workers as “independent contractors“ to do regular work. Over the past several years, this issue continues to be hotly litigated in many state and federal courts up and down the state of California, including many class actions (FedEx, UPS, SuperShuttle and Uber, to name a few). Under the state and federal law, workers are presumed to be employees unless the employer can prove otherwise. The primary factors looked at by the courts are the nature of the job duties, and the employer's right of control (whether actually exercised or not) over the manner and means by which the work is accomplished. Courts also look at a number of “secondary factors” to determine whether the worker is an employee or an independent contractor: the right to terminate at will; whether the worker is engaged in a distinct occupation or business from that of the employer; and the level of skill required. (Other secondary factors include the kind of occupation, whether the principal or the worker supplies the instrumentalities or tools and 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, and the intent of the parties.)

2. Paying a “salary” to nonexempt employees to avoid paying overtime often results in substantial liability to the employer. There are three main types of exempt employees under California law: executive, professional and administrative. The pertinent wage orders set forth the requirements for each. This is a tricky, heavily litigated area and frequently is decided on a case-by-case basis. Titles do not matter nearly as much as the actual duties performed on a daily basis. Unless the employee's actual job duties are exempt under one of the above exceptions under California and/or federal law, he or she is entitled to minimum wages, overtime, meal breaks, and a host of other protections afforded non-exempt employees, irrespective of whether he or she is paid a salary, or whose job title is supervisor, manager, director or similar title. Courts and the DLSE quantitatively and qualitatively examine or “audit” the employee's actual job duties to determine whether the majority of time (51%) of each work day is spent on exempt or nonexempt duties. As an example, an employee labeled a supervisor who works an eight-hour shift, but does not supervise at least two employees for more than four of those hours will not qualify for the executive exemption under California law, and will be entitled to overtime, meal breaks, and other rights as a nonexempt employee.

3. Failure to provide timely duty-free meal periods results in an hour's pay per day per employee. (Labor Code ' 512(a)). Under the Labor Code, most employees are entitled to the opportunity to take a 100% duty-free 30-minute meal period, approximately in the middle of their shift, and be free to leave the premises. Employers need not “police” or ensure that the meal break is actually taken, but on the other hand, cannot “coerce, encourage or incentivize” the employee to give up his or her meal break. (Brinker Restaurant Corp. v. Superior Court, 53 Cal 4th 1004, 1040 (2012)).

What employers should do is make every effort to allow employees to take their meal breaks, but an employee can decline to take it, in which case he or she must be paid for the work time. There are limited exceptions that allow workers performing indispensable functions for the business of the employer, such as a dispatcher for an ambulance or transportation company, to voluntarily and in writing agree to have a paid “on-duty” lunch period. However, these are limited exceptions and not the general rule, which requires a duty-free meal (and rest periods).

4. Failure to obtain workers' compensation insurance can result in substantial fines and a stop order. All employers, except the state, must either obtain workers' compensation or be permissibly self-insured. (Labor Code ' 3700(a)). Failure to comply can result in stop orders and/or penalties. (Labor Code ” 3710.1, 3722(a)) ($1500 per employee paid to State treasury).

5. Bad wage statements without all 10 required items . Statements must include: 1) gross wages earned; 2) total hours worked (non exempt employees only); 3) piece-rate units and rate if applicable; 4) all deductions; 5) net wages earned; 6) pay period; 7) employee's name and last four digits of SSN or employee I.D. number; 8) name and address of legal entity that is the employer; 9) applicable hourly rates and corresponding hours at each rate; 10) As of July 1, 2015, notice of the amount of available paid sick leave or in lieu of PTO time (Labor Code 246(h) provides such notice may be provided separately or as part of wage statement). Violation could cost the employer $250 per employee per payday, up to a cap of $4,000 per employee, plus penalties, fees, and reasonable attorney fees (Labor Code ' 226(e)).

6. Willful failure to pay final wages immediately on the last day worked following termination or within 72 hours of quitting or resigning without notice can result in up to 30 days (six weeks) of wages as a “waiting time” penalty. (Labor Code ” 201, 202(a), 203). Final wages includes all amounts owed to the employee, such as earned wages, vacation pay and other items as well.

7. No “self-help” deductions or set-offs by the employer from an employee paycheck except when authorized by law. Examples of improper set-offs would be for breakage charges, erroneous wage overpayments, vacation pay errors, overpayment for expenses or similar deductions. Under the wage orders (paragraph 8), employers are prohibited from making any deduction from wages or require reimbursement from an employee for any cash shortage, breakage, or loss of equipment, unless it can be shown that such losses were caused by the employee's dishonest or willful act, or by gross negligence. Employers may not even request the employee to voluntarily reimburse the employer for such losses. On the other hand, employers may request the employee to voluntarily agree to repay wage overpayments made in error, or, failing such agreement, file a civil lawsuit to recover such amounts.

8. Generally, employees cannot agree to waive rights under the Labor Code . Examples of improper waivers would include waiving overtime pay, working “off the clock” with the employer's know- ledge; settling wage claims for less than all past wages due, pressured to work during meal breaks, and accepting cash wages without complete wage statements.

We conclude this discussion in next month's newsletter.

George F. Camerlengo, a partner with Gray Duffy, has more than 40 years' experience as a civil litigator in the California Bay Area. The author is greatly indebted to Fred Duscha, formerly a senior attorney for the Labor Commissioner for 25 years, for his invaluable insights and review of the contents of this article.

In today's litigious environment, many California employers, despite their best intentions, are frequently hit with costly wage and hour claims and lawsuits by their employees, as well as the Labor Commissioner's own enforcement agency. The Labor Commissioner is the appointed executive in charge of the Division of Labor Standards Enforcement (DLSE), the state agency responsible for enforcing California's labor laws. Some of these claims are legitimate, some are not, but employers must defend against all such claims, often incurring hefty attorneys' fees in the process. This article discusses some of the more common mistakes occurring in this minefield, and strategies to consider when such claims are filed.

Background

Before discussing specific problems and strategies, several general observations are in order. Broadly speaking, there are two practical rules governing wage and hour disputes in California:

• Practical Rule No. 1: 99% of wage and hour laws, both state and federal, favor the employee.
• Practical Rule No. 2: All deputy Labor Commissioners, trial and appellate courts, wage and hour employment attorneys, and some employers are aware of Rule No. 1.

Wage and hour litigation can be very expensive for employers for several reasons. First, most state wage claims have a three- or four-year statute of limitations, and many such claims, if successful, give rise to penalties, interest and “fee shifting,” i.e., an award of attorneys' fees by the court to the successful employee, paid by the employer, which thus often faces double attorneys' fees. (Labor Code statutory claims can go back three years from the date of the violation and such claims are also covered by the Unfair Competition Law, Business & Professions Code ' 17200 et seq., which provides for a four-year period in which to sue.)

Second, over the past several years, the number of individual wage and hour claims has risen dramatically. (The latest reported data from the DLSE indicates that for the year 2012, it assessed a total of $161 million in unpaid wages and penalties, and minimum wage and overtime wage violations.) The Labor Commission has been more aggressive both in expediting hearings on individual wage claims brought by employees, and in increasing its own enforcement and investigative activities, such as unannounced spot audits, citation hearings, and lawsuits. Third, class actions have also been proliferating, striking fear among employers served with such a complaint. Such collective actions, which can range from several dozen to several thousand plaintiff employees, are frequently described as “bet the company” litigation, with good reason. Employers frequently face the unenviable Hobson's choice of either settling up front by paying a huge amount to class counsel and their clients, or litigating, thereby incurring huge defense costs and fees, plus the risk of losing even a bigger judgment at the end of years of trial and appeal.

Finally, these cases tend to be “labor intensive,” i.e. , requiring a lot of attorney time. The relevant law, both state and federal, has many moving parts: 1) the California Labor Code; 2) the 18 Wage Orders published by the Industrial Welfare Commission, covering different industries, occupations and minimum wage rules; 3) opinion letters of the Division of Labor Standard Enforcement, (DLSE) (commonly referred to as the Labor Commissioner); 4) the DLSE's administrative regulations; 5) federal law, including the Fair Labor Standards Act (FLSA) 29 USC ” 201-219, and its implementing administrative regulations; and 6) myriad state and federal court decisions interpreting the above laws. Employers must comply with both state and federal laws if they engage in interstate commerce or the production of goods used in interstate commerce. Wending your way through this legal thicket is not for the faint of heart.

Confronting a Claim

When confronted with a wage and hour claim, an “ostrich” approach by employers usually leads to a bad outcome. Ignoring known or suspected violations or informal complaints by employees is, inevitably, a poor strategy at best. At the other extreme, automatically “circling the wagons” and choosing to fight all claims “to the death” irrespective of the merits of an individual claim in order to deter future suits can also lead to disastrous results. While such litigation is sometimes unavoidable, the vast majority of wage and hour claims can usually be settled at a fraction of the total cost to the employers if both sides objectively and in good faith assess the risks and expenses of litigation.

While settlement is usually better than costly litigation, avoiding such claims in the first instance is even better. So, what are the major wage and hour red flags to avoid? In the author's experience, the following list, while not all inclusive, highlights the most frequently litigated claims:

1. Hiring workers as “independent contractors“ to do regular work. Over the past several years, this issue continues to be hotly litigated in many state and federal courts up and down the state of California, including many class actions (FedEx, UPS, SuperShuttle and Uber, to name a few). Under the state and federal law, workers are presumed to be employees unless the employer can prove otherwise. The primary factors looked at by the courts are the nature of the job duties, and the employer's right of control (whether actually exercised or not) over the manner and means by which the work is accomplished. Courts also look at a number of “secondary factors” to determine whether the worker is an employee or an independent contractor: the right to terminate at will; whether the worker is engaged in a distinct occupation or business from that of the employer; and the level of skill required. (Other secondary factors include the kind of occupation, whether the principal or the worker supplies the instrumentalities or tools and 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, and the intent of the parties.)

2. Paying a “salary” to nonexempt employees to avoid paying overtime often results in substantial liability to the employer. There are three main types of exempt employees under California law: executive, professional and administrative. The pertinent wage orders set forth the requirements for each. This is a tricky, heavily litigated area and frequently is decided on a case-by-case basis. Titles do not matter nearly as much as the actual duties performed on a daily basis. Unless the employee's actual job duties are exempt under one of the above exceptions under California and/or federal law, he or she is entitled to minimum wages, overtime, meal breaks, and a host of other protections afforded non-exempt employees, irrespective of whether he or she is paid a salary, or whose job title is supervisor, manager, director or similar title. Courts and the DLSE quantitatively and qualitatively examine or “audit” the employee's actual job duties to determine whether the majority of time (51%) of each work day is spent on exempt or nonexempt duties. As an example, an employee labeled a supervisor who works an eight-hour shift, but does not supervise at least two employees for more than four of those hours will not qualify for the executive exemption under California law, and will be entitled to overtime, meal breaks, and other rights as a nonexempt employee.

3. Failure to provide timely duty-free meal periods results in an hour's pay per day per employee. (Labor Code ' 512(a)). Under the Labor Code, most employees are entitled to the opportunity to take a 100% duty-free 30-minute meal period, approximately in the middle of their shift, and be free to leave the premises. Employers need not “police” or ensure that the meal break is actually taken, but on the other hand, cannot “coerce, encourage or incentivize” the employee to give up his or her meal break. ( Brinker Restaurant Corp. v. Superior Court , 53 Cal 4th 1004, 1040 (2012)).

What employers should do is make every effort to allow employees to take their meal breaks, but an employee can decline to take it, in which case he or she must be paid for the work time. There are limited exceptions that allow workers performing indispensable functions for the business of the employer, such as a dispatcher for an ambulance or transportation company, to voluntarily and in writing agree to have a paid “on-duty” lunch period. However, these are limited exceptions and not the general rule, which requires a duty-free meal (and rest periods).

4. Failure to obtain workers' compensation insurance can result in substantial fines and a stop order. All employers, except the state, must either obtain workers' compensation or be permissibly self-insured. (Labor Code ' 3700(a)). Failure to comply can result in stop orders and/or penalties. (Labor Code ” 3710.1, 3722(a)) ($1500 per employee paid to State treasury).

5. Bad wage statements without all 10 required items . Statements must include: 1) gross wages earned; 2) total hours worked (non exempt employees only); 3) piece-rate units and rate if applicable; 4) all deductions; 5) net wages earned; 6) pay period; 7) employee's name and last four digits of SSN or employee I.D. number; 8) name and address of legal entity that is the employer; 9) applicable hourly rates and corresponding hours at each rate; 10) As of July 1, 2015, notice of the amount of available paid sick leave or in lieu of PTO time (Labor Code 246(h) provides such notice may be provided separately or as part of wage statement). Violation could cost the employer $250 per employee per payday, up to a cap of $4,000 per employee, plus penalties, fees, and reasonable attorney fees (Labor Code ' 226(e)).

6. Willful failure to pay final wages immediately on the last day worked following termination or within 72 hours of quitting or resigning without notice can result in up to 30 days (six weeks) of wages as a “waiting time” penalty. (Labor Code ” 201, 202(a), 203). Final wages includes all amounts owed to the employee, such as earned wages, vacation pay and other items as well.

7. No “self-help” deductions or set-offs by the employer from an employee paycheck except when authorized by law. Examples of improper set-offs would be for breakage charges, erroneous wage overpayments, vacation pay errors, overpayment for expenses or similar deductions. Under the wage orders (paragraph 8), employers are prohibited from making any deduction from wages or require reimbursement from an employee for any cash shortage, breakage, or loss of equipment, unless it can be shown that such losses were caused by the employee's dishonest or willful act, or by gross negligence. Employers may not even request the employee to voluntarily reimburse the employer for such losses. On the other hand, employers may request the employee to voluntarily agree to repay wage overpayments made in error, or, failing such agreement, file a civil lawsuit to recover such amounts.

8. Generally, employees cannot agree to waive rights under the Labor Code . Examples of improper waivers would include waiving overtime pay, working “off the clock” with the employer's know- ledge; settling wage claims for less than all past wages due, pressured to work during meal breaks, and accepting cash wages without complete wage statements.

We conclude this discussion in next month's newsletter.

George F. Camerlengo, a partner with Gray Duffy, has more than 40 years' experience as a civil litigator in the California Bay Area. The author is greatly indebted to Fred Duscha, formerly a senior attorney for the Labor Commissioner for 25 years, for his invaluable insights and review of the contents of this article.