Wage and Hour Law Update : Wage & Hour Lawyer & Attorney : Jackson Lewis Law Firm : Minimum Wage, Overtime & Service Contracts

In August, we discussed the California Supreme Court’s ruling addressing the circumstances under which a non-California resident can be covered by that state's employee-friendly Labor Code.  Sullivan v. Oracle Corp., 51 Cal. 4th 1191 (2011).  Yesterday, the Court of Appeals for the Ninth Circuit adopted the state court’s ruling, rejecting Defendant’s constitutional challenges to that decision.  Sullivan v. Oracle Corp., 2011 U.S. App. LEXIS 24625 (9th Cir. Dec. 13, 2011).  California-based employers must be mindful of Sullivan's applicability to their non-California employees.

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As we recently discussed, interplay between state wage-and-hour laws and other statutes (federal or state) is not always seamless, as neither the state wage statute nor the competing law or regulation at issue properly addresses the extent to which their scope might interfere with each other. However, as employment statutes, the wage-and-hour laws are often construed broadly, and some courts are reluctant to limit their scope regardless of the presence of another statute. In a recent example of this judicial reticence, the United States Court of Appeals for the Ninth Circuit reversed a trial court decision finding that a district court could not adjudicate plaintiffs’ state wage-and-hour law claims against SuperShuttle because it lacked subject matter jurisdiction. Kairy v. SuperShuttle Int'l, 2011 U.S. App. LEXIS 22161 (9th Cir. Nov. 3, 2011).       

Plaintiffs, “franchisee” van drivers for SuperShuttle in California, allege they were misclassified as independent contractors for the purposes of various provisions of the California Labor Code. The trial court applied a three-part test laid out by the California Supreme Court to resolve conflicts potentially implicating the jurisdiction of Public Utilities Commission (“PUC”). The trial judge determined that: 1) the PUC had authority to formulate policy regarding the classification of all drivers for so-called passenger stage corporations (“PSCs”), including SuperShuttle; 2) the PUC had exercised such authority by issuing a General Order relating to PSC conduct, and a decision interpreting that order; and, accordingly 3) that to allow plaintiffs’ wage action to proceed would interfere with this regulation of PSC drivers. Id. at 6-7. In reversing, the appellate court acknowledged that the PUC had authority to regulate the relationship between a PSC, such as SuperShuttle, and its drivers, and that it was a “close” question as to whether the General Order issued by the PUC constituted an exercise of this authority. However, the appellate court ruled that application of the wage/hour laws would not interfere with the PUC regulations governing drivers. Thus, the Public Utilities Code was “not implicated, and the district court retains subject matter jurisdiction over this case.”

Public sector employers, and all businesses performing work for public sector entities, must closely analyze the interplay of employment statutes and the regulatory environment governing their particular industry.

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As discussed by our colleagues at the California Workplace Blog, California governor Jerry Brown has signed into law AB 1396, requiring all employers doing business in California to draft written contracts for any agreements with employees that involve commissions as a method of payment for services.  California joins New York in the vanguard of making such a writing a requirement.  N.Y. Labor Law § 191(1)(c).  Of course, such a writing remains a best practice under almost all circumstances. 

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California, like several other states including Massachusetts and New York, has historically been harsh on employers which abuse the independent contractor designation, classifying individuals who are integrated into their business and function as employees as contractors for the purposes of avoiding tax and wage costs. In fact, Federal Express’ now decade-long battle with courts and agencies over its classification of drivers as independent contractors originates in part from the California state appellate decision in Estrada v. Fedex Ground Package System, Inc., 154 Cal. App. 4th 1 (2007). Now, the California legislature has added a new measure which, barring an unlikely veto, expands misclassification liability further.

Senate Bill 459, passed on September 8, 2011, would make it unlawful for any “person” to willfully misclassify an individual as an independent contractor—not just for a statutory “employer” to do so. This raises the specter of individual liability for misclassifications under the new law. The bill also imposes a penalty of $5,000 to $15,000 for each violation, with escalators to the $10,000 to $25,000 range based on the finding that a given person or company has engaged in a “pattern or practice” of violation. The law also provides that anyone found in violation must post a notice to employees and the public regarding the violation, potentially creating a “ripple effect” for further claims. 

Violations of 459 are predicated on “willful misclassification”, which is defined as “avoiding employee status for an individual by voluntarily and knowingly misclassifying that individual as an independent contractor.” This broad language, with the conjunctive requirements of voluntariness and knowledge, will create ambiguities (and of course litigation) in the wake of the law’s passage as to interpretation of this definition.

The difficult and expensive wage-and-hour compliance environment in California is not news. However, this new enactment, once it receives the likely approval of Governor Brown, would expand exposure both in terms of potentially liable parties (i.e., individuals) and the costs of misclassification. Any entity or individual conducting business in the State of California which has not yet analyzed its classification of workers as contractors is well advised to do so now.

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The FLSA’s learned professional exemption provides an exemption from overtime for employees who have academic credentials in a field of “science or learning customarily acquired prolonged academic instruction” and who utilize this formal educational training in the performance of their job duties. Typical examples include doctors, lawyers, and certified public accountants, and doctors and lawyers need not even be paid on a salary basis. States with wage and hour laws generally have a similar exemption.

Historically, overtime disputes regarding the use of this exemption have centered in particular fields, such as engineering or, more recently, accounting. In a recent appellate decision from California, the Court of Appeal for the First Appellate District considered and rejected a challenge to the application of the California Labor Code’s learned professional exemption in the legal field. Zelasko-Barrett v. Brayton-Purcell, LLP, 2011 Cal. App. LEXIS 1080 (Cal. App. 1st Dist. Aug. 17, 2011).

In Zelasko, the Defendant firm utilized law students and law school graduates who had not yet passed the bar in the positions of Law Clerk I and Law Clerk II, respectively. Plaintiff held the Law Clerk II position prior to his admission to the bar for approximately 2 years, then moved on to the position of Associate Attorney. The Marin County Superior Court held that the plaintiff was properly classified as exempt when he held the position of Law Clerk II. 

Observing that the “federal regulations after which [the California learned professional exemption] was explicitly patterned . . . condition the learned professions exemption under federal law upon completion of an advanced course of education, not upon licensure,” the appellate Court ruled that possession of the degree, along with Defendant’s undisputed evidence that a Law Clerk II was required to perform all the same duties as a junior attorney, satisfied the exemption’s requirements.

Zelasko is an encouraging result for legal industry employers, which simultaneously highlights the broad scope of potential wage and hour liability. Industry employers must ensure that all employees classified as exempt are properly classified under federal and state law.  

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In a long awaited decision, California’s Supreme Court has ruled that the State’s Labor Code provisions governing overtime pay may apply to non-residents working in California for “a California-based employer.” Sullivan v. Oracle Corp., 51 Cal. 4th 1191 (2011). A detailed analysis of the decision and its potential implications is available here.

California wage-and-hour practitioners and commentators continue to await the California Supreme Court’s ruling regarding the scope of the Labor Code’s “meal and rest” requirements in Brinker Restaurant Corp.

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Wage and hour plaintiffs, like all plaintiffs, seek recovery from the largest, most viable defendants. Often, employees who separate from failing businesses seek to broaden the scope of the concept of “employer” within the meaning of wage-hour laws and include as defendants other potentially-liable parties with “deep pockets.” As discussed here, a federal court in Pennsylvania recently rejected call center plaintiffs’ efforts to ensnare Bank of America in their FLSA litigation on a joint employer theory. Now, a federal court in California – applying California state law – has rejected a similar effort to include the (defunct) primary employer’s outside Human Resources and Benefits consultancy as a joint employer. Field v. Am. Mortg. Express Corp., 2011 U.S. Dist. LEXIS 84601 (N.D. Cal. Aug. 2, 2011).

Plaintiff Field was employed by Defendant American Mortgage Express. However, under American Mortgage’s contract with co-defendant Gevity HR, Gevity was responsible for administering all Human Resources functions, including recruitment, the development of workplace resources for recruited employees, and payroll. A Gevity employee served as American Mortgage’s human resources director. Further, the contract between the two parties expressly stated that employees recruited and employed pursuant to this program would be jointly employed by both entities. 

Plaintiff Field sued both entities under various California Labor Code provisions. Defendant American Mortgage failed to appear in the case, and defendant Gevity (despite the contractual language) moved for summary judgment as to its employer status. Applying the California Supreme Court’s recent decision in Martinez v. Combs, 49 Cal. 4th 35 (2010), Judge Edward Chen of the Northern District of California rejected Fields claim against Gevity because Field could not establish that: 1) Gevity exercised control over plaintiff’s wages, hours or working conditions; 2) Gevity suffered or permitted Field to work; or, 3) that Gevity engaged plaintiff. The Judge dismissed Gevity’s role as “ministerial,” observing that the material decisions relating to Fields’ employment all were made by American Mortgage executives, and rejected Field’s assertion that he, executive director of American Mortgage’s Western Division Wholesale Lending operations, was required to “consult with or obey” Gevity’s employee with respect to human resources matters. 

Fields is a favorable decision for all employers, and for outside human resources consultants and PEOs in particular. Of course, employers must remain vigilant in analyzing the control their organization exerts over sub-contractors, independent contractors and the employees of any other organization.

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As discussed in detail on Jackson Lewis’ California Workplace Blog, the Ninth Circuit has resuscitated the California Labor Code’s “learned professional” exemption, reversing a decision from the Eastern District of California which held that unlicensed accountants could not qualify as a matter of law.  Campbell v. PricewaterhouseCoopers, LLP, 2011 U.S. App. LEXIS 12062 (9th Cir. Feb. 15, 2011).

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The surge of state wage and hour claims continues in California. Among the numerous California Labor Code provisions which has been the subject of repeated litigation is California Labor Code § 226(a) (“226”), which creates specific requirements concerning the content of employee wage statements. Included among its provisions is a requirement that wage statements indicate the “total hours worked by the employee, except for any employee whose compensation is solely based on a salary and who is exempt from payment of overtime.” Last month, a California appeals court analyzed this statute in the context of a claim brought by a non-exempt co-manager, who claimed that her wage statements violated this 226 requirement. Morgan v. United Retail, 2010 Cal. App. LEXIS 1194 (Cal. App. 2d Dist. June 23, 2010).

As recited by the court, the alleged unlawful wage statement contained the following information:

For employees who did not work any overtime hours during the pay period, their wage statements listed the total regular hours worked by the employee, which equaled the total number of hours worked. For employees who worked overtime hours during the pay period, their wage statements separately listed the total regular hours worked and the total overtime hours worked by the employee. However, the statements did not add the regular and overtime hours together and list the sum of those hours in a separate line.

Plaintiff Morgan’s claim, which had been rejected by the trial court on summary adjudication, was that this failure to combine non-overtime and overtime hours and provide a “separate line” indicating total hours constituted a violation of 226. 

The appeals court, after noting that no Court had previously analyzed a wage statement which “separately lists the total number of regular hours and the total number of overtime hours worked by the employee,” reviewed the existing decisions analyzing 226’s “total hours worked” requirement. Observing that the cases finding 226 violations focused on the inaccurate or misleading nature of the wage statements in question (such as wage statements providing an “average” number of hours worked, as opposed to actual hours worked), and citing a recent federal decision dismissing a 226 claim on a similar theory (Rubin v. Wal-Mart Stores, Inc., 599 F.Supp.2d 1176 (N.D.Cal. 2009)), the Court held that the failure to provide a separate line with the total hours did not constitute a violation. The Court rejected plaintiff’s contention that a violation occurred because the information provided was insufficient to calculate proper overtime, observing that the plaintiff and other putative class members were paid by the hour, and not on a “salary, commission, or piece-rate basis.”

Morgan provides some much-needed clarity regarding an employer’s obligations under 226. Inclusion of the “separate line” in wage statements (as Morgan indicates United Retail later did), reduces uncertainty and legal risk.  

Wage and hour compliance is a constant struggle due to the need not only to comply with the FLSA but also with all applicable state laws.

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In a decision reiterating important independent contractor issues for employers, the Ninth Circuit Court of Appeals last week reversed a lower court decision holding that certain delivery drivers were properly classified as independent contractors under various provisions of the California Labor Code. Narayan v. EGL, Inc., 2010 U.S. App. LEXIS 14279 (9th Cir. July 13, 2010).

At the trial court level, Judge Ronald M. Whyte of the Northern District of California concluded that the drivers, although residents of California providing delivery services in California, were independent contractors under the laws of Texas, the governing law set forth in the drivers’ “Leased Equipment and Independent Contractor Services” agreement with EGL, a nationwide provider of logistics services.  In a footnote, the court further held that “[t]he result would be no different if California law governed.”

Reversing the decision, the Ninth Circuit observed that ‘[w]hether the Drivers are entitled to those benefits [under the Cal. Lab. Code] depends on whether they are employees of EGL, which in turn depends on the definition that the otherwise governing law--not the parties--gives to the term ‘employee’” (emphasis added). The Circuit Court held that the parties’ selection of Texas law to “govern” the contract applied only to disputes about interpretation of the contract (i.e, Texas contract law), not the application of employment statutes like the California Labor Code. Simply put, the Circuit Court held that the drivers’ claims under the Cal. Labor Code did not “arise” from the contract (i.e., did not call primarily for interpretation of that contract) – the contract was simply relevant evidence relating to their claims of employee status.  Finally, the Court reversed Judge Whyte’s ruling that the drivers were independent contractors (even under California law) because, in the Court’s view, he “did not apply the relevant factors [for IC status] identified by the Supreme Court of California to the facts in this case.”

While the Appellate Court’s failure to recognize the choice of law clause may not be relevant to most employers, the central holding and vital takeaway is very straightforward: independent contractor status is generally narrowly construed and currently under intense scrutiny. Further some aspects of the relevant analysis vary not only from state to state but from statute to statute. Additionally, and critically, the intent of the parties as reflected by the parties’ agreement is often of little importance to an administrative agency’s or court’s analysis, as Narayan clearly demonstrates.

All employers, and especially those with multi-state operations, must focus on the propriety of their organization’s use of contractors.   A more detailed analysis of this issue can be found here.

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As every California employer knows, wage and hour class actions in California are never-ending.  One basis for many of these class actions has been employers' alleged non-compliance with California meal and rest period requirements.  As to meal periods, the two overriding issues have been whether an employer is required to ensure non-exempt employees take their meal period or just offer such an opportunity and whether such meal period must be taken prior to completion of 5 hours of work.   This issue has significant financial ramifications to California employers as California law imposes a penalty of 1 hour of wages for each day an employee misses a meal period and for each day an employee misses a rest period.  The California Supreme Court is currently reviewing these issues in two consolidated cases and is expected to schedule oral argument in the coming months.  Once oral argument before the court occurs and the court hands down its decision within 90 days thereafter as required by California law, we hope there will be some clarity on these issues.

Robert Pattison, Managing Partner of Jackson Lewis' San Francisco office, has prepared a white paper discussing these issues in detail.  This white paper, which includes a statutory analysis and a discussion of the shifting positions of the State Labor Commissioner, can be accessed at this link. Most importantly, Jackson Lewis suggests that to ensure compliance pending this decision, California employers continue to ensure that no non-exempt employees works more than 5 hours without taking a meal period.

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