California has set precedents in this area, and "copycat suits" have now followed in other parts of the country. This article explores a number of significant recent developments in California state and federal courts that affect employers with nationwide operations. This article also highlights a few key recent decisions and offers practical strategies to prevent future claims.
Existing and future exposure: updates in law
Recent wage and hour class actions have included claims of off-the-clock work, failure to pay overtime, misclassification of exempt positions or of independent contractors, meal and rest break violations, failure to pay commissions or bonuses, paycheck stub violations, uniform violations and waiting-time penalties. We discuss some of these in greater detail below.
State and federal regulations set forth specific factors to qualify for each exemption. For example, to be exempt from overtime pay under California law, employees must be "primarily engaged" in exempt duties, which means that more than 50 percent of their time should be devoted to exempt work. Further, the employee must meet minimum weekly salary requirements in order to qualify for the exemptions.
Misclassification of employees: Two recent decisions shed light on the importance of properly classifying employees as exempt. In Harris v. Superior Ct. of Los Angeles County, 154 Cal. App. 4th 164 (2007) (rev. granted), the court restrictively interpreted the administrative exemption when it highlighted the distinction between the administrative and production worker dichotomy. The court held that California claims adjusters did not qualify under the administrative exemption and that they were merely "production" workers since most of their work involved the daily functions of the employer’s business operations. The court reasoned that the primary type of work that the claims adjusters performed, which included investigating and estimating claims, setting coverage boundaries and negotiating settlements, was not carried out at the level of management policy or general operations and therefore such employees did not qualify under the exemption as performing duties "directly related to management policies or general business operations." The California Supreme Court has granted review of Harris to make a final determination on this issue.
Similarly, in Eicher v. Advanced Business Integrators, Inc., 151 Cal. App 4th 1363 (2007), the court found the employee was improperly classified under the administrative exemption because he frequently engaged in the day-to-day business functions of his employer, including customer service and executing the employer’s software programs. The court again emphasized the distinction between administrative employees who "perform work directly related to management policies or general business operations" and production employees "whose primary duties are producing the commodities, whether goods or services, that the enterprise exists to produce."
Enforcing release of wage claims: As a solution to misclassification of employees, some employers have attempted to reclassify the job groups at risk and pay employees for the alleged unpaid overtime in exchange for signing a release. In 2007, the 9th Circuit Court of Appeal in Dent v. Cox Communications Las Vegas, Inc., 502 F.3d 1141 (9th Cir. 2007), did not find that the scope of the release was valid. The court held that a release of claims under the Fair Labor Standards Act, even when issued with supervision of the secretary of labor and produced on the Department of Labor’s approval form, did not release all claims prior to the date of the release.
Off-the-clock work and "de minimis" activities: Another hotly litigated area concerns claims of off-the-clock work versus "de minimis" activity, which is not otherwise compensable. This can include activities employees engage in immediately prior to and after clocking in and out for work. In IBP v. Alvarez, 546 U.S. 21 (2005), the Supreme Court agreed with the 9th Circuit and found that time spent walking to and from the production floor, as well as waiting to remove protective clothing, was compensable because the activities were a part of a "continuous workday." However, the court reasoned that the time spent "waiting to don—time that elapses before the principal activity of donning integral and indispensable gear" is not compensable.
In Gorman v. The Consolidated Edison Corp., 488 F.3d 586 (2d Cir. 2007), the court found that nuclear power plant employees were not entitled to compensation under the FLSA for time spent going through security or "donning and doffing" personal protective gear, because the activity was not considered an "integral" part of their responsibility. In Anderson v. Cagle’s Inc., 488 F.3d 945 (11th Cir., 2007), the court also found that donning and doffing protective clothing was non-compensable activity because the items qualified within the definition of clothes under 29 U.S.C. section 203(o) and were excluded the by collective bargaining agreement.
Meal and rest break violations: California employers are required to provide hourly employees with a 30-minute unpaid meal break and two 10-minute rest breaks. Under California Labor Code section 226.7, an employer incurs an hour of pay as violation for every meal or rest period it fails to timely provide an employee. With every missed meal break resulting in an additional hour of pay, the potential exposure can be significant.
Late last year, the California Supreme Court in Murphy v. Kenneth Cole Productions, Inc., 40 Cal. 4th 1094 (2007), held that the additional hour of pay was a "wage" and therefore subject to a three-year statute of limitations. Murphy also held that an employer could meet its burden to establish compliance by demonstrating they had not forced an employee to forgo a break or had not required an employee to work through break.
In July 2007, in a decision that favored employers, White v. Starbucks, 2007 U.S. Dist. LEXIS 48922, (N.D. Cal. July 2, 2007), similarly held that the employee must show he was "forced to forgo his meal breaks as opposed to merely showing that he did not take them regardless of the reason." The court ruled employers are not required to ensure employees take their meal breaks, but rather only that they must offer them to employees. The court reasoned that forcing employers to actively ensure all employees took their breaks "would be impossible to implement for significant sectors [of industries] in which large employers may have hundreds or thousands of employees working multiple shifts."
Prior to the White v. Starbucks decision, Perez v. Safety-Kleen Systems, 2007 U.S. Dist. LEXIS 48308 (N.D. Cal. Jun. 27, 2007), put the burden on the employer, finding that "an employer must do something affirmative to provide a meal period, and may not merely assume such breaks are taken." Citing a state Division of Labor Standards Enforcement opinion letter, the court held that an employer’s obligation to provide employees with a proper meal period "is not satisfied by assuming that the meal periods were taken, because employers have ‘an affirmative obligation to ensure that workers are actually relieved of all duty.’ "
Class-action waivers in arbitration agreements: The California Supreme Court decided in Gentry v. Superior Court, 2007 Cal. LEXIS 93786 (Aug. 30, 2007), that class-action waivers may be deemed unenforceable. The court provided guidance for the trial court in determining whether such agreements can be enforceable, specifying that the following factors must be evaluated: the size of the potential individual recovery; the potential for retaliation against members of the class; whether absent members of the class may not be informed about their rights; and other "real world" obstacles to the vindication of class members’ right to overtime pay through individual arbitration.
In October 2007, in Murphy v. Check ‘N Go of Cal. Inc., A114442 (Cal.Ct.App., 10/17/07), the court held a class-action waiver in an arbitration agreement signed by a retail manager of Check N’ Go of California Inc. was unconscionable. The court upheld the trial courts’ decision and found that the arbitration agreement as a whole was unenforceable as it "permeated with unlawful purpose."
Implementing change and mitigating potential risks is crucial to limiting liability. Employers can use existing resources to quickly and efficiently identify exposure and mitigate damages. For example:
1. Conduct an internal audit to determine areas of vulnerability. Because employers bear the burden of proof, they should carefully weigh the benefits and risks associated with the classification of their employees. Employers should frequently conduct audits of their payroll practices and update their classifications to ensure positions are properly classified.
This process includes: becoming familiar with the regulations and updates; reviewing all exempt positions to determine if they are properly classified; monitoring work and relevant job descriptions for exempt employees to confirm exempt responsibilities and reclassifying positions if necessary.
2. Implement changes by modifying and utilizing existing resources. Employers can use existing systems to better track hours of work. For example, existing resources such as computer systems and fob-keys can be used to mandate log-in and log-out procedures.
3. Implement ongoing training and education to ensure the laws are understood by employees.
4. Mitigate the potential for misclassification by clearly defining job duties and responsibilities. Clearly defining responsibilities with training and performance evaluations that reiterate the same message are simple ways of guarding against violation.
5. Update record-keeping practices. The successful defense of any class-action lawsuit requires that employers maintain accurate and detailed records and documentation in the event that such records are later needed to refute alleged claims. The more accurate the record-keeping system is, the less chance of being presented with an exaggerated class-action claim for overtime and unpaid wages. Time clocks or other reliable electronic systems may be the best route for an employer wanting to ensure accurate records.
6. Diversify practices. An easy way to defeat claims of class allegation is to demonstrate that your practices vary by individuals and location. You can demonstrate this by drafting job descriptions and performance evaluations that emphasize ability to use discretionary judgment. Additionally, providing local operations discretion to implement certain practices that are specific to that location also creates a record of diverse practices.
This is a modified version of an article that previously appeared in the Daily Journal and is being posted with permission of the Daily Journal Corp.