United States: "We’re Not In Kansas Anymore" California Employment Law for the Non-California Employer - Part 1

California has, over the past several decades, developed a unique body of employment law that distinguishes it from virtually any other state. These changes have arisen from statutes, court decisions and administrative regulations. They have one thing in common: private sector employees in California have far more protections in almost any area of employment law than their counterparts in other states. Conversely, employers in California, regardless of the state where the employer is headquartered, face a daunting challenge in complying with California laws that are inconsistent with corresponding federal law or the law of many other states. This is true even when one compares California employment law to that of other large, industrial states such as New York, Illinois or Pennsylvania.

This paper will identify the principal areas in which California employment law is different from the law non-California employers generally are familiar with. This paper is not a detailed or exhaustive examination of the topic. Any employer doing business in California, but based elsewhere, should consult with an experienced human resource consultant or labor counsel regarding virtually any significant employment decision affecting a California-based employee.

II. The Scope of California Employment Law.

Generally speaking, California’s employment laws apply to employees living and working in California. However, the California Division of Labor Standards Enforcement ("DLSE" or the "Labor Commissioner") contends that California’s Labor Code (which includes its unique wage and hour laws), applies to California-based employees who may temporarily work out of state (even as to periods when they may be out of the state).

California’s Fair Employment and Housing Act ("FEHA", which is a broad-based employment discrimination statute, applies to all California-based employees, regardless of where the employer is headquartered. However, it does not apply to nonresidents of California who are employed outside the state, even though the employer may be headquartered here. Campbell v. Arco Marine Inc., 42 Cal. App. 4th 1850 (1996)

As a rule of thumb, an out of state employer should assume that California’s employment laws will apply to any person living in California and performing a significant portion of his/her duties here. The employer should also assume that any employee temporarily transferred to California will be covered by California employment law while he/she is based in California.

III. Wage/Hour Law and Payment of Wages.

California has extremely detailed requirements for payment of wages to employees and for wage/hour (minimum wage and overtime) law. The following are the most significant differences between California law and corresponding federal law:

A. California Statutory and Regulatory Scheme.

Most of the California wage/hour requirements are found either in the Labor Code or the Wage Orders issued by the California Industrial Welfare Commission ("IWC").¹ Attached to this paper as Exhibit 1 is a copy of IWC Order No. 4, which is applicable to employees in mechanical, technical, clerical and similar occupations, unless the employer is not governed by a different wage order. The IWC has issued 16 wage orders, most of which are for specific industries.² The IWC’s wage orders are currently very similar with respect to most, but not all areas of significance.

The California Labor Code and the Wage Orders contain no exemption for small employers. Employers having even a handful of employees must comply with these requirements.

The California wage/hour requirements are especially dangerous for two additional reasons: (1) the California Supreme Court has permitted class actions, on a state-wide basis, to enforce overtime rules, Sav-On Drugstores, Inc. v. Superior Court, 34 Cal. 4th 319 (2004) and (2) substantial penalties are available for Labor Code violations, in addition to unpaid wages, interest, attorneys’ fees and court costs.

B. The California Labor Code Private Attorneys General Act.

The California Labor Code Private Attorneys General Act ("PAGA") went into effect on January 1, 2004. This statute was amended by California Senate Bill 1809, effective August 11, 2004. PAGA creates a penalty for any violation of the Labor Code which did not previously have a penalty provision. It permits private employees or former employees to recover penalties whether or not the state labor relations agency (the Labor and Workforce Development Agency or "LWDA") is also authorized to recover the penalty. In essence, PAGA is a "bounty hunter" statute that substantially raises the ante for any Labor Code violation. PAGA arguably imposes penalties even if the violation is technical and causes no direct economic harm. It also contemplates class actions or other collective actions for the collection of such penalties.³

PAGA was passed by the Democrat-controlled California Legislature and signed by former Governor Gray Davis shortly after he lost the recall election in 2003. Almost immediately, numerous PAGA suits were filed by employees or former employees, seeking huge amounts of penalties for sometimes trivial or technical Labor Code violations. For example, Amgen, Inc. was sued in a case seeking more than $170,000,000 for allegedly failing to post legally-mandated workplace posters and for failing to submit its employment application to the California Labor Commissioner under an obscure Labor Code statute. The proliferation of abuse of private PAGA lawsuits led to Senate Bill 1809 which cured some of the worst PAGA excesses. Senate Bill 1809however, leaves the original penalty statute intact.

As amended, an employee or former employee wishing to sue under PAGA must do the following:

• Pre-filing written notice must be given to both the employer and the LWDA of the specific Labor Code violation alleged. The LWDA has 30 days to determine whether it will investigate the alleged violation itself. If LWDA elects not to investigate, the private PAGA lawsuit may go forward. In practice, LWDA has routinely declined to investigate PAGA claims, preferring to allow the private suits to proceed.

• If the LWDA does determine to investigate, it has 120 days to do so (after the initial 30 day period). If LWDA issues a citation against the employer, no private PAGA suit can proceed. If, however, the LWDA fails to issue any citation or simply does not act at the end of 120 additional days, the private PAGA suit may proceed.

• As amended, PAGA includes a "cure" provision which permits employers a right to cure Labor Code violations once the employer receives the 30 day notice. However, as to all significant Labor Code violations, the right to cure provision does not cut off any liability for penalties or back pay.

• As amended by Senate Bill 1809PAGA no longer permits private lawsuits for penalties where the employer has failed to post mandatory workplace posters or has failed to file its employment application with the Labor Commissioner.

As amended, PAGA also creates a somewhat perverse incentive for the LWDA not to become involved. If the LWDA pursues a Labor Code violation itself, it receives none of the proceeds from any settlement or judgment. If it defers to the private PAGA plaintiff, it receives seventy-five percent (75%) of the proceeds. The remaining twenty-five percent (25%) is the "bounty" given to the employee or former employee and his or her attorney. In addition to penalties, unpaid wages or other damages, a plaintiff in a PAGA suit can also recover reasonable attorneys’ fees, interest and court costs.

C. Payment of Wages.

The California Labor Code requires that wages for nonexempt employees be paid at least twice a month. Bona fide exempt employees may be paid once a month. There are complicated statutory rules regarding the time of payment but, generally speaking, employers may use either bimonthly or biweekly payrolls for nonexempt employees.

An employee in California who is terminated or discharged must be immediately paid all accrued wages and vacation pay. An employee who quits with more than 72 hours notice must also be paid all wages due and vacation pay upon quitting. An employee who quits with less than 72 hours notice must be paid all unpaid wages and vacation pay within 72 hours after notice of quitting. An employer who willfully fails to pay an employee on quitting of discharge in accordance with these rules is subject to "waiting time penalties" under Labor Code Section 203. Under this penalty statute, if an employee is discharged or quits and is not timely paid, his or her wages continue until full payment occurs, for a period not to exceed 30 days. Theoretically, if an employer "shorts" an employee even a small amount on a final paycheck, the employee can recover a full 30 days’ wages.⁴

D. Deductions or Setoffs.

California has a very strict rule against any involuntary deduction or setoff from an employee’s wages, except in limited circumstances. Setoffs for benefits such as health insurance, if approved in writing by the employee, are permissible. The Wage Orders preclude any setoff for cash shortages, breakage or loss of equipment, unless the employer can demonstrate that the losses were caused by a dishonest or willful act. Setoffs for ordinary negligence are absolutely prohibited. An improper setoff from a final paycheck can result in Section 203 "waiting time" penalties. These restrictions derive from Labor Code Sections 221 through 224and several court cases, notably Kerr’s Catering Service v. Department of Industrial Relations, 57 Cal. 2d 319 (1962) The Labor Commissioner even has opined that an employer cannot "setoff" a debt owed to it by the employee from the employee’s final paycheck. See, Barnhill v. Robert Saunders & Co., 125 Cal. App. 3d 1 (1981) The Labor Commissioner will permit the employer to recover a debt by obtaining a written agreement from the employee, such as a promissory note, and reducing the debt through periodic repayments (such as a fixed amount every pay period). In the event of termination, the employer cannot accelerate the debt. It can only recover the next periodic payment.

Similarly, employers cannot recover from employees amounts for returned merchandise unless the returns were identifiable to a specific employee. Hudgins v. Neiman Marcus Group, Inc., 34 Cal. App. 4th 1109 (1995) It is not even clear in California that an employer can unilaterally recover an inadvertent overpayment of wages from a subsequent paycheck.

Under California law, even paying a bonus to employees can violate the Labor Code. In Ralphs Grocery Co. v. Superior Court (Swanson), 112 Cal. App. 4^th 1090 (2003) the California Court of Appeal held that a "net earnings" bonus plan violated Labor Code Sections 201221and various other provisions for nonexempt employees. The "net profit" bonus plan calculated the amount of net profits by deducting merchandise shortages, workers compensation expenses and other ordinary business expenses. According to the Court of Appeal, this rendered the plan illegal and a violation of both the Labor Code and the IWC Wage Orders as to nonexempt employees. Employers must not include the cost of workers compensation claims, merchandise or cash shortages or other ordinary business expenses, when calculating "net profit" for purposes of a bonus plan for nonexempt employees. NOTE: The holding in the Ralphs case will be reviewed by the California Supreme Court in Prachasaisoradej v. Ralphs Grocery Co., Inc. discussed infra.

Because any unlawful wage deduction or setoff can result in Section 203 "waiting time" penalties, an employer must be extremely careful in making any such setoff period as a general rule, the employer should always obtain a written agreement from the employee. Even then, many setoffs are simply unlawful (such as a setoff for breakage or negligence).

E. Vacation Pay.

In California, vacation pay is considered a form of wages. The employer has no legal obligation to provide vacation pay. However, the employer must treat vacation pay as a "vested" benefit similar to wages. Therefore, "use it or lose it" rules are unlawful in California. Suastez v. Plastic Dress-Up Co., 31 Cal. 3d 774 (1982)

As interpreted by the Labor Commissioner, the Suastez case means that an employer who provides paid vacations must pay all accrued but unused vacation pay at the time the employee terminates or quits, in accordance with the rules stated above for final paychecks. An employer may impose a reasonable introductory period during which no vacation time accrues. It may also control when vacation may be taken (for example, no vacation during the busy season or when others in the department are on vacation). What the employer cannot do is impose a "forfeiture" on vacation pay. However, an employer may have a policy which includes an "accrual cap." An accrual cap is a provision stating that vacation pay will stop accruing when the employee reaches a specific amount of accrued vacation. These policies, if properly written, have been approved by California courts. Boothby v. Atlas Mechanical Inc., 6 Cal. App. 4th 1595 (1992) Some employers have established bona fide ERISA vacation plans. Such plans are exempt from California state law regulation if properly implemented.

According to the Labor Commissioner, "personal time off" policies are the equivalent of vacation pay and are not subject to forfeitures. This is true because the personal time off can be used, at the employee’s election, either for sick leave or vacation. If the time off is paid, and can be used for the employee’s personal reasons and is not contingent on an event (such as illness) it is considered equivalent to vacation pay. In contrast, a sick leave bank, which can be used only in the event of the employee’s illness, is not considered equivalent to vacation pay and the no-forfeiture rule does not apply.

When an employee terminates, the employer must calculate the accrued vacation pay on a pro-rata basis and pay that amount at the employee’s last rate of pay.

F. Overtime Rules-Exemptions.

California recognizes the executive, professional, administrative and outside sales exemptions. However, these exemptions are more restrictive than their federal law counterparts. A detailed description of the California exemptions is beyond the scope of the paper. However, the following is a summary of the primary differences between the California exemptions and the federal exemptions.

• Remuneration Requirement – To be exempt under the administrative, executive or professional exemption in California, the employee must earn a salary of at least twice the current state minimum wage (currently this amount is $2,340 per month).

• The employee must spend at least 50% of his or her working time in "exempt" duties. This is different than the federal "primary duty" test, which is not quantitative but qualitative.⁵ For computer professionals, to be exempt as a professional, the individual must be paid at least $45.84 per hour, as opposed to the federal standard of $27.63 per hour.⁶ Under California law, the computer professional must be paid the $45.84 amount for every hour worked.

• To qualify for the executive exemption, in California the employee must be licensed in one of the following recognized professions: law, medicine, dentistry, optometry, architecture, engineering, teaching or accounting. Licensed pharmacists and registered nurses are not considered exempt "professionals." The professional exemption in California also includes persons primarily engaged in a "learned or artistic profession" although generally these terms are defined similarly to federal law as it existed in 2000.

• To qualify for the outside sales exemption, the person must be customarily and regularly work more than half the working time away from the employer’s place of business selling tangible or intangible items or obtaining orders or contracts for products, services or the use of facilities.

As with the federal exemptions, the employer has the burden of proof to establish that the employee is exempt, and the exemptions are construed narrowly.

One exemption which is broader in California for certain employees, than under federal law, is the "inside sales" exemption. This exemption is California is only available under Wage Orders Nos. 7 (the retail industry) and 4 (technical, clerical, mechanical and other similar employees not covered by a separate industry Order). However, for those two Wage Orders it can be fairly effective: the person is exempt from overtime if he or she receives more than half of his/her compensation in the form of commissions and is paid at least 1.5 times the minimum wage.

California overtime rules can be enforced by a class action on a state-wide basis, in proper circumstances. Sav-On DrugstoresInc., supra. The Sav-On case is extremely troubling because it permitted certification of a class of store managers and assistant managers on the basis of "aggregate" proof. This means that the plaintiff, in order to obtain certification of the class, did not have to show that all managers performed substantially identical jobs or tasks. The class could be certified on the basis of a handful of sworn statements from managers or assistant managers, claiming that hundreds of other employees were misclassified for overtime purposes. Additionally, proof of damages in a wage hour class action in California can be made based on "aggregate" proof or statistical evidence. Bell v. Farmer’s Insurance Exchange, 115 Cal. App. 4^th 715 (2004)

G. Salary Basis Rules for Exemptions.

To be exempt, the employee must earn at least twice the state’s minimum wage for full time employment, or currently $2,340 per month.⁷

There has been considerable debate in California regarding "pay docking" for salaried employees. This area of law is somewhat in flux due to new appointments within the Labor and Workforce Development Agency, and a top-to-bottom review of the agency’s administrative Opinion Letters as a result of court decisions and the election of Governor Schwarzenegger. In general, however, "pay docking" for salaried employees is permissible under the federal guidelines that existed prior to 2004. However, there is currently a controversy whether an exempt employee’s accrued vacation bank (or personal time off bank) may be docked for partial day absences. The Labor Commissioner has opined that, while sick leave may be docked in partial day increments, an employee’s vacation pay or personal time off leave bank may not be docked in partial day increments. Similarly, the Labor Commissioner has opined that, in the event of a temporary plant closure or furlough (such as commonly occur at the holidays) the exempt employee’s salary may be discontinued only if the plant is closed for a full workweek. The exempt employee’s vacation pay may not be affected for any temporary closure or shut down of less than a full work week, and only then if the employer’s vacation policy requires employees to take vacation during a specified period during the year, the furlough occurs during that time period and at least nine months notice of the furlough or the shutdown is given in advance.

The Labor Commissioner has acknowledged that exempt employees are subject to salary docking when on "intermittent leave" under the Family and Medical Leave Acts.

H. Overtime Pay Requirements – The "Eight-Hour Day".

Federal law requires overtime only for hours worked in excess of 40 in a workweek. By contrast, California requires overtime pay be paid in the following circumstances.

• Where the employee works more than eight hours in a workday

• Where the employee works more than 40 hours in a workweek

• Where the employee works seven consecutive days in the same workweek.

The employee is entitled to overtime at time and one-half the regular rate of pay for all hours worked in excess of eight and less than 12. The employee is entitled to double time at the regular rate of pay for hours worked in excess of 12 in a single work day. If the employee works on all seven days in the same workweek, the employee is entitled to time and one-half for the first eight hours worked on the seventh day and double time for all hours worked in excess of eight on the seventh day.

The employer must calculate overtime based on all three methods (daily, weekly and seventh-day) and pay the largest amount of the three. This usually means that the employer must pay overtime based on the "daily overtime" formula. California’s "daily overtime" rule results in much higher overtime payments than the federal "weekly overtime" method.

Agricultural employers are subject to a different maximum workday. There are several exemptions to the seventh-day overtime requirement.⁸

The definitions of "workday" and "workweek" are generally similar to those in federal law. Additionally, the definition of "regular rate of pay" is generally similar to the federal definition.

The calculation of overtime in California law is somewhat different than that in federal law, especially for salaried non-exempt personnel. For those individuals, the "regular rate of pay" is determined by dividing the employee’s weekly compensation (including salary and "extras") by a number no greater than 40 (even if the employee worked more than 40 hours in the workweek). Similarly, the federal "fluctuating workweek" method of calculating overtime is not permitted in California under current law. As with the federal calculation of "regular rate of pay, items which are not contingent, such as commissions or bonuses paid according to a formula) are added into the calculation of "regular rate."

I. "Alternative Work Weeks."

California has a unique rule which permits employers to avoid "daily overtime" (overtime for hours in excess of eight in a single workday) under limited circumstances. The California "alternative work week" provisions allow an employer to propose "a regularly scheduled alternative work week schedule of not more than ten hours per day within a 40 hour work week without the payment of an overtime rate of compensation." Typically, alternative work weeks could consist of four days of work per week at ten hours per day, or four days per week at nine hours and a fifth day at four hours. An alternative work week schedule must not provide for less than four hours work in any shift. The employer must propose the alternative work week in writing, must conduct a meeting with employees to discuss the schedule, and employees then vote (at least 14 days after the informational meeting) whether or not to adopt the schedule. If two-thirds of the employees eligible for the schedule vote in the affirmative, the schedule may go into effect no sooner than 30 days after the election. The results of the election must be reported in writing within 30 days after the results are final to the California Division of Labor Statistics and Research. The employer may not intimidate or coerce employees to vote either way in the election. The employer must hold the election during regular working hours at the employees’ worksite. The employer must also make a reasonable effort to find a work schedule of no more than eight hours in a work day in order to accommodate an employee who was eligible to vote in the election but is unable to work the alternative work week adopted.⁹

One of the attractive features of the alternative work week arrangement is that it may apply to a particular "work unit," which is defined as a "division, a department, a job classification, a shift, a separate physical location, or a recognized subdivision of any such work unit." A work unit may even be an individual employee, as long as that employee meets the criteria for an identifiable work unit.

Once adopted, the alternative work week may be repealed, at the initiative of the employees, but only after 12 months from the date the same group of employees voted to adopt the alternative work week schedule.

There are additional, detailed requirements for the adoption of alternative work week schedules and the pre-adoption election. A non-California employer should not attempt this process without the assistance of an experienced human resource consultant or employment lawyer.

J. "Make Up" Time.

The alternative work week arrangement applies to an entire "work unit" and requires the somewhat cumbersome election process. However, the IWC Orders also include a provision for "makeup" time for individual employees, without payment of daily overtime. This provision allows an employee to request to "make up" time which is lost "as a result of a personal obligation of any employee" within the same work week, without payment of daily overtime. However, the employee may not work more than 11 hours in any one day or 40 hours in the work week. The employee must voluntarily (and without coercion) make a written request and the employer must approve the written request before the additional time is worked.

Under this provision, an employee may take off two hours in a work day to attend to a personal obligation (such as a child’s activities or an educational event). The employee may then "make up" those two hours in a different work day in the same work week, by working ten hours that day, without any daily overtime. Employers may inform employees of this provision but cannot encourage or solicit employees to request makeup time. See Wage Order Section 3(M).

K. Meals and Breaks.

Both the California Labor Code and the California Wage Orders require meals and breaks for non-exempt personnel. The employer must "provide" a 30 minute off-duty, unpaid meal period within the first five hours of work, unless the employee works no more than six hours per day. See Labor Code Section 512 and Wage Order Section 11. The meal period must be "off duty" meaning that the employee must be relieved of all duties. If the employee works no more than six hours, the meal period may be waived by mutual consent of the employer and the employee. If the employee works more than ten hours in a workday, a second 30-minute meal period must be provided. The second meal period may be waived by mutual consent, however, if the total hours worked do not exceed 12 and the first meal period was not waived. On-duty meal periods are permitted only when the nature of the work prevents the employee from being relieved of all duty and the employer and the employee enter into a written agreement permitting an on-duty meal period. See Wage Order, Section 11.

Nonexempt employees must each receive rest periods of at least ten minutes "net rest time" for each four hour work period or major fraction thereof. See Wage Order, Section 12. This generally means that a nonexempt employee working an ordinary eight hour day will receive two rest periods of ten minutes each. Rest periods are compensable time and must be paid (unlike the unpaid 30-minute meal period).

California law requires that nonexempt employees keep contemporaneous, permanent records of the time each meal period begins and ends. No time records are required to be kept for rest periods.

In 2000, the California legislature created a penalty which applies where the employer does not "provide" a meal or rest period in accordance with the IWC Orders. Where the employer does not "provide" a meal or rest period, the employer must pay one additional hour’s pay for that workday at the employee’s regular rate of pay. See Labor Code Section 226.7(b) The meal/rest penalty has generated substantial litigation in California including numerous class actions. Many employers have failed to keep the required time records for meal periods. The California Labor Commissioner recently issued proposed regulations to clarify several issues regarding meals and rest periods and the Labor Code Section 226.7 penalties.¹⁰ The proposed regulations generally would relieve the employer of liability for penalties if the employer "makes available" the meal period or rest period, keeps the necessary time records for the meal period, and posts the appropriate Wage Order. These regulations, if adopted in their current form, would also permit employees to voluntarily delay the first meal delay until after the fifth hour of employment, provided no employer coercion is involved. The proposed regulations have met with resistance from organized labor and employee advocates.

There is also great debate whether the meal/rest penalty is a form of wages. The difference is that the statute of limitations in California for claims for penalties is one year while the statute for wage claims is three years.

Footnotes

Please click on the link below to view part 2 of this article