national employment law council 18th annual conference houston, texas april 2013 wage ... ·...

© 2013, Paul Hastings LLP

NATIONAL EMPLOYMENT LAW COUNCIL 18TH ANNUAL CONFERENCE

HOUSTON, TEXAS APRIL 2013

WAGE AND HOUR LAW UPDATE

Barbara L. Johnson thanks the following individuals for providing the paper for this panel.

M. Kirby C. Wilcox Thomas E. Geidt

Yewleh Chee

Paul Hastings LLP


TABLE OF CONTENTS

Page

Page i

Table of Authorities ............................................................................................................................. v

SECTION 1: THE RULES FOR CLASSIFYING AND COMPENSATING NON-EXEMPT EMPLOYEES ......................................................................................... 1

I. INTRODUCTION ............................................................................................................... 1

II. EMPLOYEES ARE PRESUMED TO BE NON-EXEMPT ....................................... 1

III. DETERMINING HOURS WORKED ............................................................................ 1

A. General Rule .............................................................................................................. 1

B. On-Call, Standby and Waiting Time ...................................................................... 2

1. Federal Law .................................................................................................. 2

2. California Law .............................................................................................. 5

C. Training Time ............................................................................................................ 8

1. Federal Law .................................................................................................. 8

2. California Law .............................................................................................. 9

D. Travel Time ................................................................................................................ 9

1. Federal Law .................................................................................................. 9

2. California Law ............................................................................................ 11

E. Meal and Rest Periods ............................................................................................ 15

1. Federal Law ................................................................................................ 15

2. California Law ............................................................................................ 16

F. Rounding .................................................................................................................. 23

1. Federal Law ................................................................................................ 23

2. California Law ............................................................................................ 24

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IV. DETERMINING THE REGULAR RATE OF PAY .................................................. 25

A. General Rule ............................................................................................................ 25

1. Federal Law ................................................................................................ 25

2. California Law ............................................................................................ 26

B. Bonuses .................................................................................................................... 26

1. Federal Law ................................................................................................ 26

2. California Law ............................................................................................ 27

C. Gifts .......................................................................................................................... 28

1. Federal Law ................................................................................................ 28

2. California Law ............................................................................................ 28

D. Profit-Sharing Plans ................................................................................................ 28

1. Federal Law ................................................................................................ 28

2. California Law ............................................................................................ 29

E. Prizes ......................................................................................................................... 29

1. Federal Law ................................................................................................ 29

2. California Law ............................................................................................ 29

V. OVERTIME CALCULATIONS ...................................................................................... 30

A. General Rule ............................................................................................................ 30

1. Federal Law ................................................................................................ 30

2. California Law ............................................................................................ 30

B. Rule for Employees Who Have Two or More Different Regular Rates of Pay ............................................................................................................. 30

1. Federal Law ................................................................................................ 30

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2. California Law ............................................................................................ 31

VI. SPECIAL CALIFORNIA WAGE AND HOUR ISSUES ........................................... 31

A. “Alternative Workweek Schedules” ..................................................................... 31

B. Commission Sales Agreements ............................................................................. 32

C. Vacation Pay ............................................................................................................ 38

D. Personal and Floating Holidays ............................................................................ 42

E. Record-keeping Requirements .............................................................................. 43

F. Itemized Pay Stubs ................................................................................................. 43

G. Payment of Wages at Termination ....................................................................... 46

H. Business Expense Reimbursement ....................................................................... 50

I. Days of Rest ............................................................................................................ 50

J. Compensation Issues Arising Upon Employee Reclassification ..................... 51

K. “Private Attorneys General” Enforcement of Labor Code Penalties ............. 51

L. “Suitable Seating” for Employees ........................................................................ 53

M. Settlement Procedures ............................................................................................ 56

N. Application of California’s Wage-and-Hour Laws to Business Travelers Based in Other States ............................................................................ 57

O. The Wage Theft Prevention Act .......................................................................... 58

P. Reporting Time Pay ................................................................................................ 59

Q. Split-Shift Premiums .............................................................................................. 61

SECTION 2: ARE YOUR “EXEMPT” EMPLOYEES PROPERLY CLASSIFIED? ...................................................................................................................... 63

I. THE “WHITE COLLAR” EXEMPTIONS ................................................................... 63

A. Federal Law.............................................................................................................. 63

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1. The Remuneration Standard .................................................................... 63

2. Primary Duty Standard ............................................................................. 64

3. Executive Employees ............................................................................... 64

4. Administrative Employees ....................................................................... 67

5. Professional Employees ........................................................................... 74

6. Highly Compensated Employees ............................................................ 77

7. Salary Basis ................................................................................................. 78

B. California Law ......................................................................................................... 81

1. The Amount of Compensation Standard .............................................. 81

2. The Duties Standard: A Fifty Percent Plus Rule ................................. 82

3. Developments in Overtime Misclassification Litigation ..................... 92

II. THE COMPUTER-RELATED PROFESSIONALS EXEMPTION ....................... 96

A. Federal Law.............................................................................................................. 96

B. California Law ......................................................................................................... 97

III. THE OUTSIDE SALESPERSONS EXEMPTION ..................................................... 99

A. Federal Law.............................................................................................................. 99

B. California Law ....................................................................................................... 101

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TABLE OF AUTHORITIES

Page(s)

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CASES

Aleksick v. 7-Eleven, Inc., 205 Cal. App. 4th 1176 (2012) ................................................................................................... 24

Aleman v. Airtouch Cellular, 209 Cal. App 4th 556 (2012) ................................................................................... 22, 60, 61, 62

American Software, Inc. v. Ali, 46 Cal. App. 4th 1386, 54 Cal. Rptr. 2d 477 (1996) ......................................................... 32, 33

Areso v. CarMax, Inc., 195 Cal. App. 4th 996 (2011) ..................................................................................................... 36

Arias v. Superior Court, 46 Cal. 4th 969 (2009) ........................................................................................................... 51, 52

Armour & Co. v. Wantock, 323 U.S. 126 (1944) ................................................................................................................... 2, 4

Auer v. Robbins, 519 U.S. 452, 117 S.Ct. 905 (1997) ......................................................................................... 100

Baldwin v. Trailer Inns, Inc., 266 F.3d 1104 (9th Cir. 2001) .................................................................................................... 64

Bell v. Farmers Insurance Exchange, 115 Cal. App. 4th 715, 9 Cal. Rptr. 3d 544 (2004) .................................................... 86, 88, 89

Bell v. Farmers Insurance Exchange, 87 Cal. App. 4th 805, 105 Cal. Rptr. 2d 59 (2001), cert. denied, 534 U.S. 1041 (Nov. 26, 2001) ..................................................... 70, 71, 85, 86, 87, 89, 92, 93

Bernard v. IBP, Inc., 154 F.3d 259 (5th Cir. 1998) ...................................................................................................... 15

Berry v. Sonoma Cnty., 30 F.3d 1174 (9th Cir. 1994) .................................................................................................... 4, 6

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Bono Enters., Inc. v. Bradshaw, 32 Cal. App. 4th 968, 38 Cal. Rptr. 2d 549 (1995), disapproved of on other grounds, Tidewater Marine W., Inc. v. Bradshaw, 14 Cal. 4th 557, 59 Cal. Rptr. 2d (1996) ............................................................................. 20, 21

Boothby v. Atlas Mech., Inc., 6 Cal. App. 4th 1595, 8 Cal. Rptr. 2d 600 (1992) ................................................................... 39

Bothell v. Phase Metrics, Inc., 299 F.3d 1120 (9th Cir. 2002) .............................................................................................. 70, 89

Bratt v. County of Los Angeles, 912 F.2d 1066 (9th Cir. 1990) .............................................................................................. 88, 89

Brewer v. Patel, 20 Cal. App. 4th 1017, 25 Cal. Rptr. 2d 65 (1993) ................................................................... 8

Bright v. 99¢ Only Stores, 189 Cal. App. 4th 1472, 118 Cal. Rptr. 3d 723 (2010), accord Home Depot U.S.A., Inc. v. Superior Court, 191 Cal. App. 4th 210, 120 Cal. Rptr. 3d 166 (2010) ....................................................... 53, 54

Brinker Restaurant Corp. v. Superior Court (Hohnbaum), 53 Cal. 4th 1004, 139 Cal. Rptr. 3d 315 (Apr. 12, 2012) ............................. 16, 17, 18, 19, 50

Caliber Bodyworks, Inc. v. Superior Court, 134 Cal. App. 4th 365, 36 Cal. Rptr. 3d 31 (2005) ........................................................... 52, 53

California School of Culinary Arts v. Lujan, 112 Cal. App. 4th 16, 4 Cal. Rptr. 3d 785 (2003) ................................................................... 92

Campbell v. PricewaterhouseCoopers, LLP, 642 F. 3d 820 (9th Cir. 2011) ..................................................................................................... 92

Chindarah v. Pick Up Stix, Inc., 171 Cal. App. 4th 796, 90 Cal. Rptr. 3d 175 (2009), review denied, No. S171864 (June 10, 2009) ............................................................................................... 56, 57

Christopher v. SmithKline Beecham Corp., 132 S. Ct. 2156, 183 L. Ed. 2d 153 (2012) .............................................................. 74, 100, 101

Church v. Jamison, 143 Cal. App. 4th 1568, 50 Cal. Rptr. 3d 166 (2006) ....................................................... 40, 41

Cicairos v. Summit Logistics, Inc., 133 Cal. App. 4th 949, 35 Cal. Rptr. 3d 243 (2005) ............................................................... 44

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Combs v. Skyriver Communications, Inc., 159 Cal. App. 4th 1242 (2008) ................................................................................................... 89

D.L.S.E. v. Dick Bullis, Inc., 72 Cal. App. 3d Supp. 52, 140 Cal. Rptr. 267 (1977) ............................................................. 33

Dana Perfumes, Inc. v. Mullica, 268 F.2d 936 (9th Cir. 1959) ...................................................................................................... 33

Davis v. JP Morgan Chase & Co., 587 F.3d 529 (2d Cir. 2009) ....................................................................................................... 72

DeLeon v. Verizon Wireless, LLC, 207 Cal. App. 4th 800 (2012) ..................................................................................................... 35

Dinges v. Sacred Heart St. Mary’s Hosps., Inc., 164 F.3d 1056 (7th Cir. 1999) ...................................................................................................... 4

Donovan v. Burger King Corp., 672 F.2d 221 (1st Cir. 1982) ...................................................................................................... 64

Drumm v. Morningstar, Inc., 695 F. Supp. 2d 1014 (N.D. Cal. 2010) .................................................................................... 47

Dunlap v. Superior Court, 142 Cal. App. 4th 330, 47 Cal. Rptr. 3d 614 (2006) ............................................................... 53

Duran v. U.S. Bank National Association, 203 Cal. App. 4th 212 (Feb. 6, 2012), review granted and opin. superseded, __Cal Rptr. 3d. __, 2012 WL 1860854 (May 16, 2012) ............................................ 93, 95, 96

Edwards v. Arthur Andersen LLP, 44 Cal. 4th 937 (2008) ................................................................................................................. 50

Galvez v. Federal Express Inc., 2011 WL 1599625 (N.D. Cal. 2011) ......................................................................................... 62

Harris v. Investor’s Business Daily, Inc., 138 Cal. App. 4th 28, 41 Cal. Rptr. 3d 108 (2006) ................................................................. 34

Harris v. Superior Court, 207 Cal. App. 4th 1225 (2012) (unpublished) ......................................................................... 89

Harris v. Superior Court, 53 Cal. 4th 170 (Dec. 30, 2011) .............................................................................. 70, 86, 87, 88

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Harris v. Superior Court, 64 Cal. Rptr. 3d 547 (2007), review granted, Nov. 28, 2007 ............................................................................................................ 86, 87, 88, 89

Head v. Costco Wholesale Corp., 2011 WL 452970 (Cal. Ct. App. Feb. 10, 2011) ...................................................................... 51

Heffelfinger v. Electronic Data Systems Corp., Nos. 08-56319, 08-56384, 2012 U.S. App. LEXIS 11508 (9th Cir. June 7, 2012)....... 89, 90

Hernandez v. BCI Coca-Cola Bottling Co., No. CV 11-9484 SVW, 2012 U.S. Dist. LEXIS 55301 (C.D. Cal. Apr. 12, 2012) ............ 45

Hernandez v. Chipotle Mexican Grill, Inc., 208 Cal. App. 4th 1487 (2012) ................................................................................................... 20

Hightower v. JP Morgan Chase, N.A., CV 11-1802 PSF (PLAx) (C.D. Cal. Sept. 12, 2012) .............................................................. 24

Hines v. Longwood Events, Inc., No. 1:08-CV-11653-PBS, 2010 U.S. Dist. LEXIS 62259 (D. Mass. June 23, 2010) ............. .................................................................................................................................................. 72, 74

Home Depot U.S.A., Inc. v. Superior Court, 191 Cal. App. 4th 210, 120 Cal. Rptr. 3d 166 (2010) ................................................ 53, 54, 55

IBP, Inc. v. Alvarez, 546 U.S. 21 (2005) ....................................................................................................................... 11

Imada v. City of Hercules, 138 F.3d 1294 (9th Cir. 1998) .................................................................................................... 10

In re Farmers Insurance Exchange, Claims Representatives’ Overtime Pay Litigation, 481 F.3d 1119 (9th Cir. 2007) .................................................................................................... 71

In re Novartis Wage & Hour Litig., 611 F.3d 141 (2d Cir. 2010) ........................................................................................ 72, 73, 100

In re Wells Fargo Home Mortg. Overtime Pay Litigation, 268 F.R.D. 604 (N.D. Cal. 2010) .............................................................................................. 95

Ingram v. Cnty. of Bucks, 144 F.3d 265 (3d Cir. 1998) ......................................................................................................... 4

Jackson v. Alpharma, Inc., No. 07-3250, 2010 U.S. Dist. LEXIS 72435 (D.N.J. July 19, 2010) .............................. 72, 74

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Jirak v. Abbott Labs., Inc., 716 F. Supp. 2d 740 (N.D. Ill. 2010) ........................................................................................ 72

Karrer v. Best Buy Co., No. LA CV 11-07697 JAK, 2012 U.S. Dist. LEXIS 77242 (C.D. Cal. May 24, 2012) .............................................................................................................................................. 42

Keyes Motors, Inc. v. DLSE, 197 Cal. App. 3d 557 (1987), cited with approval by the California Supreme Court ................................................................... 36, 37

Kilby v. CVS Pharmacy, Inc., No. 09cv2051-MMA (KSC), 2012 U.S. Dist. LEXIS 76507 (S.D. Cal. May 31, 2012) .............................................................................................................................................. 55

Kirby v. Immoos Fire Protection, Inc., 53 Cal. 4th 1244 (April 30, 2012) ........................................................................................ 21, 22

Koehl v. Verio, Inc., 142 Cal. App. 4th 1313, 48 Cal. Rptr. 3d 749 (2006) ....................................................... 34, 35

Labriola v. Bank of America, N.A., No. C 12-79 CW, 2012 U.S. Dist. LEXIS 65853 (N.D. Cal. May 10, 2012) ................ 46, 47

Lamps Plus Overtime Cases, 209 Cal. App. 4th 35 (2012) ................................................................................................. 19, 20

Lindow v. U.S., 738 F.2d 1057 (9th Cir. Or. 1984) ............................................................................................ 14

Madera Police Officers Ass’n v. City of Madera, 36 Cal. 3d 403, 204 Cal. Rptr. 422 (1984) ....................................................................... 6, 8, 21

Marin v. Costco Wholesale Corp., 169 Cal. App. 4th 804, 87 Cal. Rptr. 3d 161 (2008) ............................................................... 28

Marr v. Bank of America, N.A., No. C 09-05978 WHA, 2011 U.S. Dist. LEXIS 24868 (N.D. Cal. Mar. 8, 2011) ....... 36, 37

Marti v. Grey Eagle Distribs., Inc., 937 F. Supp. 845 (E.D. Mo. 1996) ............................................................................................ 15

McAllister v. Transamerica Occidental Life Ins. Co., 325 F.3d 997 (8th Cir. 2003) ...................................................................................................... 71

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McKenzie v. Federal Express Corp., 765 F. Supp. 2d 1222 (C.D. Cal. 2011) .................................................................................... 45

McNett v. Network Management Group, Inc., No. B224221, 2012 Cal. App. Unpub. LEXIS 6712 (Cal. Ct. App. Sept. 14, 2012) ......... 67

Mendoza v. Nordstrom, Inc., No. SACV 10-00109-CJC(MLGx) (C.D. Cal. Sept. 21, 2012) ........................................ 50, 51

Morgan v. United Retail Inc., 186 Cal. App. 4th 1136 (2010) ............................................................................................. 44, 45

Morillion v. Royal Packing Co., 22 Cal. 4th 575, 94 Cal. Rptr. 2d 3 (2000) .......................................................... 7, 8, 11, 12, 14

Muldrow v. Surrex Solutions Corp., 208 Cal. App. 4th 1381 (2012) ................................................................................................... 37

Murphy v. Kenneth Cole Prods., Inc., 40 Cal. 4th 1094, 56 Cal. Rptr. 3d 880 (2007) ................................................................... 21, 22

Neisendorf v. Levi Strauss & Co., 143 Cal. App. 4th 509, 49 Cal. Rptr. 3d 216 (2006) ............................................................... 47

Overton v. Walt Disney Co., 136 Cal. App. 4th 263, 38 Cal. Rptr. 3d 693 (2006) ............................................................... 12

Owens v. Local No. 169, 971 F.2d 347 (9th Cir. 1992) .................................................................................................... 2, 3

Paton v. Advanced Micro Devices, Inc., 197 Cal. App 4th 1505, 129 Cal. Rptr. 784 (Aug. 5, 2011) .............................................. 41, 42

Pineda v. Bank of America, N.A., 50 Cal. 4th 1389, 117 Cal. Rptr. 3d 377 (2010) ....................................................................... 49

Powis v. Moore Mach. Co., 72 Cal. App. 2d 344, 164 P.2d 822 (1945) ............................................................................... 33

Prachasaisoradej v. Ralphs Grocery Co., Inc., 42 Cal. 4th 217 (2007) ................................................................................................................. 36

Price v. Starbucks Corp., 192 Cal. App. 4th 1136 (2011) ............................................................................................. 60, 61

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Provine v. Office Depot, Inc., No. C 11-00903 SI, 2012 U.S. Dist. LEXIS 93881 (N.D. Cal. July 6, 2012) ................ 29, 30

Ramirez v. Yosemite Water Co., 20 Cal. 4th 785, 85 Cal. Rptr. 2d 844 (1999) .............................................................. 36, 37, 82

Reich v. S. New England Telecommc’ns Corp., 121 F.3d 58 (2d Cir. 1997) ......................................................................................................... 15

Reimer v. Champion Healthcare Corp., 258 F.3d 720 (8th Cir. 2001) ........................................................................................................ 4

Reiseck v. Universal Commc’ns of Miami, 591 F.3d 101 (2d Cir. 2010) ................................................................................................. 72, 73

Rousseau v. Teledyne Movible Offshore, Inc., 805 F.2d 1245 (5th Cir. 1986) ...................................................................................................... 5

Roy v. Cnty. of Lexington, 141 F.3d 533 (4th Cir. 1998) ...................................................................................................... 15

Rutti, v. LoJack, 578 F.3d 1084 (9th Cir. 2009), op. withdrawn and superceded, 596 F.3d 1046 (9th Cir. 2010) ....................................................................................... 12, 13, 14

Sav-On Drug Stores, Inc. v. Superior Court, 97 Cal. App. 4th 1070, 118 Cal. Rptr. 2d 792 (2002), review granted and reversed, 34 Cal. 4th 319, 17 Cal. Rptr. 3d 906 (2004) ........................................................................... 93

Schachter v. Citigroup, Inc., 47 Cal. 4th 610 (2009) ........................................................................................................... 48, 49

Sciborski v. Pacific Bell Directory, 205 Cal. App. 4th 1152 (2012) ............................................................................................. 35, 36

See’s Candy Shops v. Superior Court, No. D060710, 2012 Cal. App. LEXIS 1132 (Oct. 29, 2012) .......................................... 24, 25

Sequeira v. Rincon-Vitova Insectaries, Inc., 32 Cal. App. 4th 632, 38 Cal. Rptr. 2d 264 (1995) ........................................................... 40, 41

Service Employees Int’l Union, Local 102 v. Cnty. of San Diego, 60 F.3d 1346 (9th Cir. 1995) ........................................................................................................ 5

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Seymour v. Metson Marine, Inc., 194 Cal. App. 4th 361, 128 Cal. Rptr. 3d 13 (2011) ................................................................. 8

Smith v. Johnson & Johnson, 593 F.3d 280 (3d Cir. 2010), accord, Jackson v. Alpharma, Inc., No. 07-3250, 2010 U.S. Dist. LEXIS 72435 (D.N.J. July 19, 2010) .............................. 72, 74

Steinhebel v. Los Angeles Times Communications, 126 Cal. App. 4th 696, 24 Cal. Rptr. 3d 351 (2005) ............................................................... 34

Suastez v. Plastic Dress-Up Co., 31 Cal. 3d 774, 183 Cal. Rptr. 846 (1982) ................................................................... 38, 41, 42

Sullivan v. Oracle Corp., 662 F.3d 1265 (9th Cir. Dec. 13, 2011) .................................................................................... 58

Sullivan v. Oracle Corp., 51 Cal. 4th 1191, 127 Cal. Rptr. 3d 185 (2011) ....................................................................... 57

Thurman v. Bayshore Traffic Management, Inc., 203 Cal. App. 4th 1112 (Feb. 27, 2012), review denied, No. S201442 2012 Cal. LEXIS 5624 (Cal. June 13, 2012) .............................................. 55, 56

United Parcel Service v. Superior Court, 196 Cal. App. 4th 57, 125 Cal. Rptr. 3d 384 (June 2, 2011) .................................................. 21

Wal-Mart Stores, Inc. v. Dukes, 564 U.S. __, 131 S. Ct. 2541 (2011) .......................................................................................... 95

Wang v. Chinese Daily News, 435 F. Supp. 2d 1042 (C.D. Cal. 2006), aff’d 623 F. 3d 743 (9th Cir. 2010), cert. granted, vac. on other grounds 2011 WL 4529967 (Oct. 3, 2011) ............................................................................................. 44

Watson v. Wood Dimension, Inc., 209 Cal. App. 3d 1359, 257 Cal. Rptr. 816 (1989) ............................................................ 33, 34

Webster v. Public School Employees of Washington, Inc., 247 F.3d 910 (9th Cir. 2001) ................................................................................................ 71, 72

Wright v. Adventures Rolling Cross Country, Inc., No. C-12-0982 EMC, 2012 U.S. Dist. LEXIS 104378 (N.D. Cal. May 3, 2012) ............... 58

Zelasko-Barrett v. Brayton-Purcell, LLP, 198 Cal. App. 4th 582, 131 Cal. Rptr. 3d 114 (Aug. 17, 2011) ............................................. 92

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STATUTES

29 U.S.C. § 185 ................................................................................................................................... 35

29 U.S.C. § 201 ..................................................................................................................................... 1

29 U.S.C. § 207(a) ............................................................................................................................... 30

29 U.S.C. § 207(e) ............................................................................................................................... 25

29 U.S.C. § 207(g)(3) .......................................................................................................................... 29

29 U.S.C. § 213 ................................................................................................................................... 96

29 U.S.C. § 213(a)(17) .................................................................................................................. 96, 97

29 U.S.C. § 254(a)(1) ............................................................................................................................ 9

29 U.S.C. § 254(b) ................................................................................................................................ 9

CAL. BUS. & PROF. CODE § 7580 .................................................................................................... 23

CAL. BUS. & PROF. CODE § 17200 ............................................................................................ 49, 57

CAL. CIV. PROC. CODE § 337 ........................................................................................................... 41

CAL. CIV. PROC. CODE § 340 ..................................................................................................... 49, 53

CAL. LAB. CODE § 95 .......................................................................................................................... 1

CAL. LAB. CODE § 200 .................................................................................................................. 1, 47

CAL. LAB. CODE § 201 ......................................................................................................... 46, 47, 48

CAL. LAB. CODE § 202 ......................................................................................................... 46, 47, 48

CAL. LAB. CODE § 203 ................................................................................................... 46, 47, 49, 53

CAL. LAB. CODE § 204 ...................................................................................................................... 25

CAL. LAB. CODE § 204.1 ............................................................................................................. 36, 38

CAL. LAB. CODE § 206.5 ................................................................................................................... 56

CAL. LAB. CODE § 206(b) ................................................................................................................. 43

CAL. LAB. CODE § 210 ...................................................................................................................... 52

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CAL. LAB. CODE § 218 ...................................................................................................................... 53

CAL. LAB. CODE § 218.5 ................................................................................................................... 22

CAL. LAB. CODE § 221 ......................................................................................................... 34, 35, 36

CAL. LAB. CODE § 223 ...................................................................................................................... 35

CAL. LAB. CODE § 224 ......................................................................................................... 34, 35, 37

CAL. LAB. CODE § 226 ............................................................................................ 44, 45, 46, 53, 59

CAL. LAB. CODE § 226.3 ................................................................................................................... 43

CAL. LAB. CODE § 226.7 ................................................................................... 16, 18, 20, 21, 52, 53

CAL. LAB. CODE § 226(a) ............................................................................................... 43, 44, 45, 46

CAL. LAB. CODE § 226(a)(2) ............................................................................................................. 45

CAL. LAB. CODE § 226(a)(9) ............................................................................................................. 45

CAL. LAB. CODE § 226(c) .................................................................................................................. 43

CAL. LAB. CODE § 226(e) ............................................................................................................ 43, 46

CAL. LAB. CODE § 227.3 ......................................................................................... 38, 40, 41, 42, 46

CAL. LAB. CODE § 500 ...................................................................................................................... 55

CAL. LAB. CODE § 510 ............................................................................................ 12, 30, 57, 58, 91

CAL. LAB. CODE § 511 ...................................................................................................................... 31

CAL. LAB. CODE § 511(a) .................................................................................................................. 31

CAL. LAB. CODE § 511(c) .................................................................................................................. 31

CAL. LAB. CODE § 511(d) .................................................................................................................. 31

CAL. LAB. CODE § 512 ................................................................................................................ 17, 23

CAL. LAB. CODE § 512(a) ..................................................................................................... 16, 17, 22

CAL. LAB. CODE § 512(b) ................................................................................................................. 22

CAL. LAB. CODE § 512(e)............................................................................................................ 22, 23

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CAL. LAB. CODE § 512(f) ............................................................................................................ 22, 23

CAL. LAB. CODE § 512(g) ................................................................................................................. 23

CAL. LAB. CODE § 514 ...................................................................................................................... 16

CAL. LAB. CODE § 515.5 ...................................................................................................... 97, 98, 99

CAL. LAB. CODE § 515.5(a)(1) - § 515.5(a)(3) ................................................................................ 97

CAL. LAB. CODE § 515.5(b) .............................................................................................................. 98

CAL. LAB. CODE § 515.6 ................................................................................................................... 91

CAL. LAB. CODE § 515.6(b) .............................................................................................................. 91

CAL. LAB. CODE § 515(c) ............................................................................................... 81, 83, 84, 91

CAL. LAB. CODE § 515(d) ................................................................................................................. 26

CAL. LAB. CODE § 515(f) .................................................................................................................. 91

CAL. LAB. CODE § 551 ................................................................................................................ 50, 51

CAL. LAB. CODE § 552 ................................................................................................................ 50, 51

CAL. LAB. CODE § 554 ...................................................................................................................... 50

CAL. LAB. CODE § 556 ...................................................................................................................... 50

CAL. LAB. CODE § 558 ......................................................................................................... 52, 55, 56

CAL. LAB. CODE § 558(a) ................................................................................................................ 56

CAL. LAB. CODE § 1194 .................................................................................................................... 22

CAL. LAB. CODE § 1198 .............................................................................................................. 53, 54

CAL. LAB. CODE § 1198.5 ................................................................................................................. 43

CAL. LAB. CODE § 2698 .................................................................................................................... 53

CAL. LAB. CODE § 2699 .................................................................................................................... 52

CAL. LAB. CODE § 2699.3 ................................................................................................................. 52

CAL. LAB. CODE § 2699.5 ................................................................................................................. 52

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CAL. LAB. CODE § 2699(e)(2) ........................................................................................................... 55

CAL. LAB. CODE § 2699(f) ................................................................................................... 53, 54, 55

CAL. LAB. CODE § 2699(f)(2) ........................................................................................................... 51

CAL. LAB. CODE § 2751 .............................................................................................................. 37, 38

CAL. LAB. CODE § 2802 .................................................................................................................... 50

CAL. LAB. CODE § 2802(a) ............................................................................................................... 50

CAL. LAB. CODE § 2802(b) ............................................................................................................... 50

CAL. LAB. CODE § 2802(c) ............................................................................................................... 50

CAL. LAB. CODE § 2804 .................................................................................................................... 50

CAL. LAB. CODE § 2810.5 ................................................................................................................. 59

CAL. VEH. CODE § 522 ..................................................................................................................... 12

REGULATIONS

29 C.F.R. pt. 1 (2001) .......................................................................................................................... 1

29 C.F.R. § 510.705 ............................................................................................................................ 97

29 C.F.R. § 541.0 (2004) .................................................................................................................... 63

29 C.F.R. § 541.2(a) (2000) ............................................................................................................... 69

29 C.F.R. § 541.2(b) - § 541.2(d) (2000).......................................................................................... 69

29 C.F.R. § 541.2(e)(1) (2000) .......................................................................................................... 69

29 C.F.R. § 541.2(e)(2) (2000) .......................................................................................................... 69

29 C.F.R. § 541.100 (2004) ............................................................................................................... 65

29 C.F.R. § 541.101 (2004) ............................................................................................................... 65

29 C.F.R. § 541.102 (2004) ......................................................................................................... 65, 82

29 C.F.R. § 541.103 (2004) ............................................................................................................... 83

29 C.F.R. § 541.103(a) (2004) ........................................................................................................... 65

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29 C.F.R. § 541.103(b) (2004) .......................................................................................................... 65

29 C.F.R. § 541.103(c) (2004) ........................................................................................................... 65

29 C.F.R. § 541.103(d) (2004)........................................................................................................... 65

29 C.F.R. § 541.104 - § 541.111 (2004) ........................................................................................... 82

29 C.F.R. § 541.104(a) (2004) ........................................................................................................... 66

29 C.F.R. § 541.104(b) (2004) .......................................................................................................... 66

29 C.F.R. § 541.104(c) (2004) ........................................................................................................... 66

29 C.F.R. § 541.104(d) (2004)........................................................................................................... 66

29 C.F.R. § 541.106(a) (2004) ........................................................................................................... 66

29 C.F.R. § 541.106(b) (2004) .......................................................................................................... 66

29 C.F.R. § 541.106(c) (2004) ........................................................................................................... 66

29 C.F.R. § 541.113 (2000) ............................................................................................................... 65

29 C.F.R. § 541.114 (2004) ............................................................................................................... 83

29 C.F.R. § 541.115 (2004) ............................................................................................................... 82

29 C.F.R. § 541.116 (2004) ............................................................................................................... 82

29 C.F.R. § 541.117 - § 541.119 (2004) ........................................................................................... 83

29 C.F.R. § 541.200 (2004) ............................................................................................................... 67

29 C.F.R. § 541.201 - § 541.205 (2004) ........................................................................................... 84

29 C.F.R. § 541.201(a) (2004) ........................................................................................................... 67

29 C.F.R. § 541.201(b) (2004) .......................................................................................................... 67

29 C.F.R. § 541.201(c) (2004) ........................................................................................................... 67

29 C.F.R. § 541.202(a) (2004) ........................................................................................................... 68

29 C.F.R. § 541.202(b) (2004) .......................................................................................................... 68

29 C.F.R. § 541.202(c) (2004) ........................................................................................................... 68

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29 C.F.R. § 541.202(d) (2004)........................................................................................................... 68

29 C.F.R. § 541.202(e) (2004) ........................................................................................................... 68

29 C.F.R. § 541.202(f) (2004) ........................................................................................................... 68

29 C.F.R. § 541.203 (2004) ............................................................................................................... 69

29 C.F.R. § 541.203(b) (2004) .......................................................................................................... 69

29 C.F.R. § 541.204 (2004) ............................................................................................................... 69

29 C.F.R. § 541.204(b)(2) (2004) ...................................................................................................... 77

29 C.F.R. § 541.205(a) (2000) ........................................................................................................... 88

29 C.F.R. § 541.205(b) (2000) .......................................................................................................... 88

29 C.F.R. § 541.205(d) (2004)........................................................................................................... 71

29 C.F.R. § 541.207 (2004) ......................................................................................................... 84, 91

29 C.F.R. § 541.208 (2004) ............................................................................................................... 84

29 C.F.R. § 541.210 (2004) ............................................................................................................... 84

29 C.F.R. § 541.213(a)(17) (2004) .................................................................................................... 63

29 C.F.R. § 541.214 (2000) ............................................................................................................... 69

29 C.F.R. § 541.215 (2004) ............................................................................................................... 84

29 C.F.R. § 541.300 (2004) ............................................................................................................... 74

29 C.F.R. § 541.301(a) (2004) ..................................................................................................... 74, 91

29 C.F.R. § 541.301(b) (2004) .................................................................................................... 75, 91

29 C.F.R. § 541.301(c) (2004) ..................................................................................................... 75, 91

29 C.F.R. § 541.301(d) (2004)..................................................................................................... 75, 91

29 C.F.R. § 541.301(e)(5) (2004) ...................................................................................................... 75

29 C.F.R. § 541.302(a) (2004) ........................................................................................................... 76

29 C.F.R. § 541.302(b) (2004) .......................................................................................................... 76

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29 C.F.R. § 541.302(c) (2004) ........................................................................................................... 76

29 C.F.R. § 541.302(d) (2004)........................................................................................................... 76

29 C.F.R. § 541.303 (2001) ............................................................................................................... 96

29 C.F.R. § 541.303(a) (2001) ........................................................................................................... 77

29 C.F.R. § 541.303(b) (2001) .......................................................................................................... 96

29 C.F.R. § 541.303(d) (2001)..................................................................................................... 77, 78

29 C.F.R. § 541.304(a) (2004) ........................................................................................................... 77

29 C.F.R. § 541.304(b) (2004) .......................................................................................................... 77

29 C.F.R. § 541.304(c) (2004) ........................................................................................................... 77

29 C.F.R. § 541.304(d) (2004)..................................................................................................... 77, 78

29 C.F.R. § 541.305 (2004) ............................................................................................................... 91

29 C.F.R. § 541.400 (2004) ............................................................................................................... 96

29 C.F.R. § 541.400(b) (2004) .......................................................................................................... 78

29 C.F.R. § 541.401 (2004) ............................................................................................................... 97

29 C.F.R. § 541.500 (2004) ............................................................................................................... 99

29 C.F.R. § 541.500(b) (2004) .......................................................................................................... 99

29 C.F.R. § 541.503 (2004) ............................................................................................................. 100

29 C.F.R. § 541.504 (2004) ............................................................................................................. 100

29 C.F.R. § 541.507 (2000) ............................................................................................................... 99

29 C.F.R. § 541.600 (2004) ......................................................................................................... 63, 97

29 C.F.R. § 541.600(a) (2004) ........................................................................................................... 78

29 C.F.R. § 541.600(e) (2004) ........................................................................................................... 63

29 C.F.R. § 541.601(a) (2004) ........................................................................................................... 77

29 C.F.R. § 541.601(b)(1) (2004) ...................................................................................................... 77

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29 C.F.R. § 541.601(b)(2) (2004) ...................................................................................................... 77

29 C.F.R. § 541.601(b)(3) (2004) ...................................................................................................... 78

29 C.F.R. § 541.601(b)(4) (2004) ...................................................................................................... 78

29 C.F.R. § 541.602 (2004) ............................................................................................................... 63

29 C.F.R. § 541.602(a) (2004) ........................................................................................................... 78

29 C.F.R. § 541.602(b)(1) (2004) ...................................................................................................... 78

29 C.F.R. § 541.602(b)(2) (2004) ...................................................................................................... 79

29 C.F.R. § 541.602(b)(3) (2004) ...................................................................................................... 79

29 C.F.R. § 541.602(b)(4) (2004) ...................................................................................................... 79

29 C.F.R. § 541.602(b)(5) (2004) ...................................................................................................... 79

29 C.F.R. § 541.602(b)(6) (2004) ...................................................................................................... 79

29 C.F.R. § 541.602(b)(7) (2004) ...................................................................................................... 79

29 C.F.R. § 541.603(a) (2004) ........................................................................................................... 80

29 C.F.R. § 541.603(b) (2004) .......................................................................................................... 80

29 C.F.R. § 541.603(c) (2004) ........................................................................................................... 80

29 C.F.R. § 541.603(d) (2004)........................................................................................................... 80

29 C.F.R. § 541.604 (2004) ............................................................................................................... 81

29 C.F.R. § 541.700(a) (2004) ........................................................................................................... 66

29 C.F.R. § 541.704 (2004) ............................................................................................................... 68

29 C.F.R. § 547.0 - § 547.3 ................................................................................................................ 29

29 C.F.R. § 549.0 - § 549.4 ................................................................................................................ 29

29 C.F.R. § 778.102 (2001) ............................................................................................................... 30

29 C.F.R. § 778.103 (2001) ............................................................................................................... 30

29 C.F.R. § 778.104 (2001) ............................................................................................................... 30

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29 C.F.R. § 778.110(a) (2001) ........................................................................................................... 25

29 C.F.R. § 778.110(b) (2001) .......................................................................................................... 26

29 C.F.R. § 778.113(a) (2001) ........................................................................................................... 26

29 C.F.R. § 778.115 (2001) ............................................................................................................... 30

29 C.F.R. § 778.209(a) (2001) ........................................................................................................... 27

29 C.F.R. § 778.209(b) (2001) .......................................................................................................... 27

29 C.F.R. § 778.210 (2001) ............................................................................................................... 27

29 C.F.R. § 778.211(a) (2001) ........................................................................................................... 26

29 C.F.R. § 778.211(b) (2001) .......................................................................................................... 26

29 C.F.R. § 778.211(c) (2001) ........................................................................................................... 27

29 C.F.R. § 778.212 (2001) ............................................................................................................... 28

29 C.F.R. § 778.213 (2001) ............................................................................................................... 28

29 C.F.R. § 778.331 (2001) ............................................................................................................... 29

29 C.F.R. § 778.333 (2001) ............................................................................................................... 29

29 C.F.R. § 778.419 (2001) ............................................................................................................... 31

29 C.F.R. § 785.15 (2001) .................................................................................................................... 2

29 C.F.R. § 785.16(a) (2001) ............................................................................................................... 2

29 C.F.R. § 785.16(b) (2001) ............................................................................................................... 3

29 C.F.R. § 785.17 (2001) .................................................................................................................... 3

29 C.F.R. § 785.19(b) (2001) ............................................................................................................. 15

29 C.F.R. § 785.23 (2001) .................................................................................................................... 5

29 C.F.R. § 785.27 (2001) .................................................................................................................... 9

29 C.F.R. § 785.28 (2001) .................................................................................................................... 9

29 C.F.R. § 785.30 (2001) .................................................................................................................... 9

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29 C.F.R. § 785.31 (2001) .................................................................................................................... 9

29 C.F.R. § 785.34 (2001) .............................................................................................................. 9, 10

29 C.F.R. § 785.35 (2001) .................................................................................................................. 10

29 C.F.R. § 785.36 (2001) .................................................................................................................. 10

29 C.F.R. § 785.37 (2001) .................................................................................................................. 10

29 C.F.R. § 785.38 (2001) .................................................................................................................. 10

29 C.F.R. § 785.39 (2001) .................................................................................................................. 11

29 C.F.R. § 785.40 (2001) .................................................................................................................. 11

29 C.F.R. § 785.41 (2001) .................................................................................................................. 11

29 C.F.R. § 785.48(b) (2001) ....................................................................................................... 23, 25

29 C.F.R. § 790.6(b) ........................................................................................................................... 11

CAL. CODE REGS. tit. 8, § 11100 (1998) ........................................................................................... 1

2002 D.L.S.E. MANUAL

D.L.S.E. Manual § 4.6........................................................................................................................ 46

D.L.S.E. Manual § 15.1.1 .................................................................................................................. 38

D.L.S.E. Manual § 15.1.12 .......................................................................................................... 40, 42

D.L.S.E. Manual § 15.1.4 .................................................................................................................. 39

D.L.S.E. Manual § 15.1.4.1 ............................................................................................................... 39

D.L.S.E. Manual § 34.6 ..................................................................................................................... 32

D.L.S.E. Manual § 34.8 ..................................................................................................................... 33

D.L.S.E. Manual § 43.3 ................................................................................................................... 101

D.L.S.E. Manual § 45.2 ............................................................................................................... 16, 20

D.L.S.E. Manual § 46.1.1 .................................................................................................................... 5

D.L.S.E. Manual § 46.2 ..................................................................................................................... 11

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D.L.S.E. Manual § 46.3.1 ............................................................................................................ 14, 15

D.L.S.E. Manual § 46.3.2 .................................................................................................................. 15

D.L.S.E. Manual § 46.5 ..................................................................................................................... 20

D.L.S.E. Manual § 46.6.3 .................................................................................................................... 7

D.L.S.E. Manual § 46.6.5 - § 46.6.8 ................................................................................................... 9

D.L.S.E. Manual § 47.1 ..................................................................................................................... 25

D.L.S.E. Manual § 47.2 ..................................................................................................................... 25

D.L.S.E. Manual § 47.3.2 .................................................................................................................... 8

D.L.S.E. Manual § 47.3.2.1 ................................................................................................................. 8

D.L.S.E. Manual § 47.5.2 .................................................................................................................... 6

D.L.S.E. Manual § 47.5.4 ................................................................................................................ 5, 6

D.L.S.E. Manual § 47.5.4.2 ................................................................................................................. 6

D.L.S.E. Manual § 47.5.5 .................................................................................................................... 6

D.L.S.E. Manual § 47.5.5.1 ................................................................................................................. 6

D.L.S.E. Manual § 47.5.6 .................................................................................................................... 7

D.L.S.E. Manual § 47.5.6.1 ................................................................................................................. 6

D.L.S.E. Manual § 49.1.1 .................................................................................................................. 25

D.L.S.E. Manual § 49.1.1 - § 49.1.3 ................................................................................................. 27

D.L.S.E. Manual § 49.1.2.4 ......................................................................................................... 28, 29

D.L.S.E. Manual § 49.1.4 .................................................................................................................. 26

D.L.S.E. Manual § 49.1.5 .................................................................................................................. 26

D.L.S.E. Manual § 49.2.4.2 ............................................................................................................... 28

D.L.S.E. Manual § 49.2.5 .................................................................................................................. 31

D.L.S.E. Manual § 49.2.6 .................................................................................................................. 31

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D.L.S.E. Manual § 50.2 ....................................................................................................................... 1

D.L.S.E. Manual § 52.3 ..................................................................................................................... 85

D.L.S.E. Manual § 53.4.1 .................................................................................................................. 82

I.W.C. WAGE ORDERS

I.W.C. Wage Order No. 1-2001 ....................................................................................................... 16

I.W.C. Wage Order No. 4-2001 ...................................................... 2, 36, 81, 82, 83, 86, 89, 90, 92

I.W.C. Wage Order No. 4-2001(1)(A)(1) ........................................................................................ 83

I.W.C. Wage Order No. 4-2001(1)(A)(1)(f).................................................................................... 81


I.W.C. Wage Order No. 4-2001(1)(A)(2)(g) ................................................................................... 81


I.W.C. Wage Order No. 4-2001(1)(A)(3)(d) ................................................................................... 81

I.W.C. Wage Order No. 4-2001(1)(A)(3)(e) ................................................................................... 91

I.W.C. Wage Order No. 4-2001(1)(M) .......................................................................................... 101

I.W.C. Wage Order No. 4-2001(2)(K) .............................................................................................. 2

I.W.C. Wage Order No. 4-2001(2)(Q) ............................................................................................ 61

I.W.C. Wage Order No. 4-2001(3)(A)(1)(c) ................................................................................... 26

I.W.C. Wage Order No. 4-2001(3)(C) ............................................................................................. 31


I.W.C. Wage Order No. 4-2001(5)(A) ............................................................................................ 60

I.W.C. Wage Order No. 4-2001(7)(A) ............................................................................................ 43


I.W.C. Wage Order No. 4-2001(11)(A) .................................................................................... 16, 20

I.W.C. Wage Order No. 4-2001(11)(B) ..................................................................................... 16, 20

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I.W.C. Wage Order No. 4-2001(12) .......................................................................................... 18, 21

I.W.C. Wage Order No. 4-2001(a) .................................................................................................. 92

I.W.C. Wage Order No. 4-2001(b) .................................................................................................. 92

I.W.C. Wage Order No. 5-2001 ................................................................................................... 7, 19

I.W.C. Wage Order No. 5-2001(1)(B)(3)(f) .................................................................................... 91

I.W.C. Wage Order No. 5-2001(2)(K) .............................................................................................. 8

I.W.C. Wage Order No. 7-2001 .......................................................................................... 36, 53, 54

I.W.C. Wage Order No. 7-2001(14) .......................................................................................... 53, 55

I.W.C. Wage Order No. 7-2001(14)(a)............................................................................................ 53

I.W.C. Wage Order No. 7-2001(20) ................................................................................................ 53

I.W.C. Wage Order No. 7-2001(20)(A) ................................................................................... 54, 55

I.W.C. Wage Order No. 9-2001 ......................................................................................................... 8

I.W.C. Wage Order No. 10-2001 ..................................................................................................... 67

I.W.C. Wage Order No. 7-2001(14)(A) .......................................................................................... 55

I.W.C. Wage Order No. 7-2001(14)(B) ........................................................................................... 55

OPINION LETTERS

D.L.S.E. Op. Ltr. (May 17, 2002) .................................................................................................... 44

D.L.S.E. Op. Ltr. (August 30, 2002) ............................................................................................... 39

D.O.L. Op. Ltr., 2008 WL 5483054 (F.L.S.A. Dec. 18, 2008) ...................................................... 4

OTHER AUTHORITIES

Christopher S. Miller, Steven J. Whitehead & Elizabeth Clark-Morrison, The Impact of Electronic Paging and On-Call Policies on Overtime Pay Under the F.L.S.A., THE LABOR

LAWYER (Summer 1995) .............................................................................................................. 5

D.L.S.E. Guidance Memo (May 31, 2005) ............................................................................... 39, 40

D.O.L. Administrator’s Interpretation No. 1 (March 24, 2010) ................................................. 73

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Wage & Hour Division, Field Operations Handbook ¶ 31c09 (1969) ........................................ 2

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SECTION 1: THE RULES FOR CLASSIFYING AND COMPENSATING NON-EXEMPT EMPLOYEES

I. INTRODUCTION

A substantial body of law governs wage and hour issues, including federal and state statutes, regulations and court decisions. Employers must carefully analyze both federal and state law when addressing wage and hour questions because the more restrictive rule - the rule that provides more expansive benefits to employees - controls.

Federal law regarding wage and hour issues primarily is contained in the Fair Labor Standards Act (“F.L.S.A.”) and its implementing regulations. See 29 U.S.C. §§ 201 et seq. (1998); 29 C.F.R. pt. 1 et seq. (2001). The Department of Labor (“D.O.L.”) is responsible for enforcing the F.L.S.A.

California law regarding wage and hour matters primarily is contained in the California Labor Code and in written wage orders promulgated by the California Industrial Welfare Commission (“I.W.C.”). See Cal. Lab. Code §§ 200 et seq. (West 1989 & Supp. 2001); Cal. Code Regs. tit. 8, § 11100 (1998). New wage orders were issued by the I.W.C. effective January 1, 2001. California’s Division of Labor Standards Enforcement (“D.L.S.E.”) administers and enforces California’s wage and hour laws. See Cal. Lab. Code § 95 (West 1989). The D.L.S.E.’s summary of the policies and interpretations which it follows in administering and enforcing California law is contained in the D.L.S.E.’s 2002 Enforcement Policies and Interpretations Manual (“2002 D.L.S.E. Manual”).

II. EMPLOYEES ARE PRESUMED TO BE NON-EXEMPT

Employees are presumptively non-exempt. See 2002 D.L.S.E. Manual § 50.2. Non-exempt employees are entitled to compensation for all overtime hours worked. An employer bears the burden of proving that an employee is exempt from this general rule. “Exemptions are narrowly construed against the employer and their application is limited to employees plainly and unmistakably within their terms.” Id. See Section 2, infra, for a discussion of exempt employee classifications.

III. DETERMINING HOURS WORKED

A. General Rule

To properly compensate its non-exempt employees, an employer first must determine the number of compensable hours its employees have worked. The F.L.S.A. does not define “hours worked.” Rather, whether an employee’s time is compensable generally turns on whether the time spent by the employee is primarily for the benefit of the employer.

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Unlike federal law, the California wage orders define “hours worked.” Under the wage orders, “hours worked” is “the time during which an employee is subject to the control of an employer, and includes all the time the employee is suffered or permitted to work, whether or not required to do so.” See I.W.C. Wage Order No. 4-2001(2)(K).1

B. On-Call, Standby and Waiting Time

1. Federal Law

a. General Rule

The F.L.S.A. does not expressly define whether on-call, standby, and waiting time are “hours worked.” Rather, the inquiry is fact specific and depends on whether the employee’s time was spent primarily for the benefit of the employer. Courts focus on the contents of any agreements between the parties, the duties of the employee, and the relation of those duties to the waiting time. E.g., Armour & Co. v. Wantock, 323 U.S. 126, 132-33 (1944); Owens v. Local No. 169, 971 F.2d 347, 350 (9th Cir. 1992).

b. On-Duty Time

Time spent on-duty during periods of unplanned inactivity, usually of short duration, counts as work time if the employee is unable to use the time effectively for his or her own purposes, and the time is controlled by the employer. For example, a secretary who reads while waiting for an assignment, a factory worker who talks to fellow employees while waiting for machinery to be repaired, and a repair person who waits for the employer’s customer to make the premises available all are regarded as working during these periods of inactivity. 29 C.F.R. § 785.15 (2001). However, as a special enforcement rule, entities employing temporary workers may enter into agreements with employees that time spent waiting on the company’s premises for work to become available shall not be counted as time worked. Wage & Hour Division, Field Operations Handbook ¶ 31c09 (1969).

c. Off-Duty Time

Periods of time during which an employer completely relieves an employee from duty and which are long enough to enable the employee to use the time effectively for his or her own purposes may be excluded from the calculation of hours worked. The employee must be informed in advance that he or she may leave the job and need not commence work until a specified hour. Whether the time is long enough to enable the employee to use the time effectively for his or her own purposes depends on all the facts and circumstances of the case. 29 C.F.R. § 785.16(a). For example, truck drivers who reach their destination but

1 The seventeen wage orders issued by the I.W.C. that went into effect on January 1, 2001 are similar, but not identical. The majority of the wage orders are industry-specific. I.W.C. Wage Order No. 4-2001, cited in the text, covers certain occupations (e.g., professional, technical, clerical, mechanical and similar workers) and applies to those employers whose operations are not included in any industries specifically defined in the wage orders.

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must care for the employer’s property while awaiting the return trip are working while waiting, whereas truck drivers who are completely relieved from duty prior to the return trip are not viewed as working during the idle time. Id. § 785.16(b).

d. On-Call Time

“On-call” time refers to periods of time during which an employee is off duty, but is required to remain available to be called in to work. According to the federal regulations:

An employee who is required to remain on call on the employer’s premises or so close thereto that he cannot use the time effectively for his own purposes is working while “on call”. An employee who is not required to remain on the employer’s premises but is merely required to leave word at his home or with company officials where he may be reached is not working while on call.

Id. § 785.17.

The federal courts interpret this language as requiring an examination of two factors: (1) the degree to which the employee is free to engage in personal activities; and (2) any agreements between the parties. Owens, 971 F.2d at 350.

Courts analyze the first factor, the degree to which an employee is free to engage in personal activities, by examining the following indicia:

1. Whether there was an on-premises living requirement;

2. Whether there were excessive geographical restrictions on the employee’s movements;

3. Whether the frequency of calls was unduly restrictive;

4. Whether a fixed time limit for response was unduly restrictive;

5. Whether the on-call employee could easily trade on-call responsibilities;

6. Whether the use of a pager could ease restrictions; and

7. Whether the employee actually engaged in personal activities during call-in time.

Id. at 351 (employer’s policy requiring mechanics to be on call during off duty hours was not so restrictive as to require the on-call time to be compensable where the mechanics did not have to remain on the employer’s premises, calls were made on a rotating basis, mechanics only had to respond to a “fair share” of calls rather than all or a percentage of

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calls and mechanics were not required to wear pagers or respond to calls within a fixed time); Dinges v. Sacred Heart St. Mary’s Hosps., Inc., 164 F.3d 1056, 1057-59 (7th Cir. 1999) (requirement that emergency medical technicians arrive at hospital within seven minutes of receiving a page did not entitle employees to payment for the on-call time because the entire city was within a seven-minute radius and there was less than 50 percent chance that any employee would receive a call during the on-call period); Ingram v. Cnty. of Bucks, 144 F.3d 265 (3d Cir. 1998); Berry v. Sonoma Cnty., 30 F.3d 1174, 1183-87 (9th Cir. 1994); D.O.L. Op. Ltr., 2008 WL 5483054 (F.L.S.A. Dec. 18, 2008) (requirements that employee be reachable at all times, abstain from alcohol or other substances, and report to work within one hour of notification did not entitle employee to payment for on-call time). This list is illustrative, not exhaustive; no one factor is determinative. Further, one court noted, “[t]echnology will undoubtedly continue to reshape our concept of the workplace, and lead to new definitions of work and worktime. Accordingly, we will continue to utilize a ‘practical approach based on the realities of each case . . . .’” Reimer v. Champion Healthcare Corp., 258 F.3d 720, 726 (8th Cir. 2001) (citing Armour, 323 U.S. at 133; second alteration in original).

Courts analyze the second factor, any agreements between the parties, based on understandings that have arisen regarding the compensability of on-call time in accordance with: (1) collective bargaining agreements that provide overtime compensation for actual call-in work, but not for other off-duty time; (2) constructive agreements arising because employees have been informed of the employer’s overtime compensation policy and continue to work under the disclosed terms of that policy; and (3) express agreements created when an employee is hired, or chooses to remain employed, after an employer’s overtime compensation policy is implemented. See Berry, 30 F.3d at 1180.

To reduce the likelihood that on-call time will be deemed compensable, employers may consider these guidelines:

1. Send on-call employees off the company premises;

2. Make sure that the employees have a reasonable amount of time to respond to call-ins;

3. Schedule and publicize on-call periods;

4. Make sure that call-backs are infrequent;

5. If possible, do not require called-in employees to wear uniforms;

6. Encourage employees to spend on-call time pursuing personal activities;

7. Carefully choose when to discipline employees for on-call policy infractions; and

8. Provide a written on-call policy to employees.

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Christopher S. Miller, Steven J. Whitehead & Elizabeth Clark-Morrison, The Impact of Electronic Paging and On-Call Policies on Overtime Pay Under the F.L.S.A., THE LABOR LAWYER

(Summer 1995).

e. Employees Required to Remain on an Employer’s Premises for Extended Periods of Time

Special considerations are applicable to employees who reside on the employer’s premises on a permanent basis or for extended periods of time (twenty-four hours or more) and who do not perform duties during the entire time that they are on the premises. As a general matter, time spent engaging in normal private pursuits such as eating, sleeping, entertaining, and other periods of complete freedom from all duties is not work time. Because of the difficulty of determining the exact hours worked under these circumstances, the federal regulations provide that “any reasonable agreement of the parties which takes into consideration all of the pertinent facts will be accepted.” 29 C.F.R. § 785.23 (2001); see also Rousseau v. Teledyne Movible Offshore, Inc., 805 F.2d 1245, 1248-49 (5th Cir. 1986) (employees required by agreement to remain on barges for seven full days but only compensated for time spent in active physical labor were not entitled to compensation for off-duty time which could be spent sleeping, eating, watching television, etc.); Service Employees Int’l Union, Local 102 v. Cnty. of San Diego, 60 F.3d 1346, 1355 (9th Cir. 1995).

2. California Law

a. General Rule

Although California’s wage orders define “hours worked,” see supra Section 1.III.A., neither the wage orders nor the Labor Code define on-call, standby or waiting time or establish rules for determining when such time must be included in hours worked. Thus, whether the time in question is compensable as hours worked depends on whether the time is controlled by the employer. See 2002 D.L.S.E. Manual § 46.1.1.

Generally, an employer has “control” of an employee if the employee’s time is so restricted that the employee cannot pursue personal activities or come and go at will. Id. § 47.5.4. The D.L.S.E. has explained:

The Division does not take the position that simply requiring the worker to respond to call backs is so inherently intrusive as to require a finding that the worker is under the control of the employer. Such factors as (1) geographical restrictions on employees’ movements; (2) required response time; (3) the nature of the employment; and, (4) the extent the employer’s policy would impact on personal activities during on-call time, must all be considered. The bottom-line consideration is the amount of “control” exercised by the employer over the activities of the worker. In some employments, the

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employer can be said to be exercising some limited control over his employee at all times. For instance, by statute the employee must give preference to the business of his employer if it is similar to the personal business he transacts. However, immediate control by the employer which is for the direct benefit of the employer must be compensated.

Id. § 47.5.6.1 (citations omitted).

To determine the extent of an employer’s control, the D.L.S.E. has adopted and applies the test outlined by the California Supreme Court in Madera Police Officers Ass’n v. City of Madera, 36 Cal. 3d 403, 204 Cal. Rptr. 422 (1984). See 2002 D.L.S.E. Manual § 47.5.4.

The Madera compensability test is a two-part analysis. The first prong is whether the restrictions on the employee were primarily directed toward the fulfillment of the employer’s requirements and policies. 36 Cal. 3d at 409. The second prong is whether the employee was substantially restricted so as to be unable to attend to private pursuits. Id. In applying the second part of the test, the D.L.S.E. indicated that it “must examine the restrictions cumulatively to assess their overall effect on the worker’s noncompensatory time.” 2002 D.L.S.E. Manual § 47.5.4.2. The D.L.S.E. specifically notes that some restrictions as to time and space may be placed on the employee, so long as the restrictions are not substantial enough to prevent the employee from attending to private pursuits. Id.

If, under the Madera test, the employee’s time is “uncontrolled,” then according to the D.L.S.E. the employee generally need not be paid for such time:

An employee who has the choice of being available or not to respond to a request by the employer to return to work for an emergency may be on uncontrolled standby if the employee is completely unrestricted to use his or her time for their own purposes. Such “free” standby time is not under the control of the employer and, thus, need not be paid.

Id. § 47.5.2. For example, the requirement that an employee wear a pager, standing alone, is not sufficient control to require the employer to pay the employee for all the hours the pager is on. Id. § 47.5.5.

Although California law is more restrictive than the F.L.S.A. with respect to on-call time, the 2002 D.L.S.E. Manual suggests that the Ninth Circuit’s decision in Berry v. Cnty. of Sonoma, 30 F.3d 1174 (9th Cir. 1994), provides guidance for California employers regarding the factors that should be considered in “determining whether restrictions placed on employees during on-call hours were so extensive that such time should be deemed ‘hours worked’ under the Fair Labor Standards Act.” 2002 D.L.S.E. Manual § 47.5.5.1. According to Berry, those factors include (1) whether there are extensive geographical restrictions on employees’ movements; (2) whether the frequency of calls is unduly restrictive; (3) whether a

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required response time is unduly restrictive; (4) whether the on-call employee can easily trade his or her on-call responsibilities with another employee; and (5) the extent of personal activities engaged in during on-call time.

In Morillion v. Royal Packing Co., 22 Cal. 4th 575, 582, 94 Cal. Rptr. 2d 3 (2000), the California Supreme Court held that “an employee who is subject to an employer’s control does not have to be working during that time to be compensated.” Accordingly, field worker employees who were required to meet each day at specified parking lots or assembly areas to be driven in employer-provided buses to the fields where they actually worked had to be paid for the transportation time. The court concluded such time was “hours worked” because the employees were prohibited from using their own transportation to get to and from the fields and, thus, they were under the employer’s control. Id. at 586. “Allowing plaintiffs the circumscribed activities of reading or sleeping [on the bus] does not affect, much less eliminate, the control Royal exercises by requiring them to travel on its buses and by prohibiting them from effectively using their travel time for their own purposes.” Id. The D.L.S.E. concurs, noting that “[t]he difference [from federal law] is that the California test places no reliance on whether the individual is engaged in “work” and, thus, the existence of an “agreement” regarding the understanding of the parties is of no importance. The ultimate consideration in applying the California law is determining the extent of the “control” exercised.” 2002 D.L.S.E. Manual § 47.5.6.

b. Employees Required to Remain on an Employer’s Premises for Extended Periods of Time

Generally, under California law, an employee who is required to remain at the employer’s place of business and respond to emergency calls is working and must be paid for all hours, even if the employee is doing nothing more than waiting for something to happen. 2002 D.L.S.E. Manual § 46.6.3.

However, I.W.C. Wage Order 5-2001, covering the public housekeeping industry, contains an exception to the requirement that an employee must be paid for all hours spent on the employer’s premises:

Except for employees employed in the “Health Care Industry”, (as that term is defined) Orders 5-2002, contain a special definition for hours worked by employees in the Public Housekeeping Industry who are required to reside on the employment premises: “ . . . in the case of an employee who is required to reside on the employment premises, that time spent carrying out assigned duties shall be counted as hours worked.” Under this definition, as applied, for instance, to a motel clerk who was required to reside on the motel grounds and to remain there 24 hours a day unless relieved, the California courts have held that only the time

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spent performing physical, mental or other specified tasks was counted as hours worked.

2002 D.L.S.E. Manual § 47.3.2 and § 47.3.2.1; I.W.C. Wage Order No. 5-2001(2)(K); see also Brewer v. Patel, 20 Cal. App. 4th 1017, 1019, 25 Cal. Rptr. 2d 65 (1993) (employees who are required to live on motel premises but work no more than five hours per day are entitled to compensation only for the time they render actual services).

In Seymour v. Metson Marine, Inc., 194 Cal. App. 4th 361, 128 Cal. Rptr. 3d 13 (2011), a California Court of Appeal addressed the compensability of on-call time for crew members who worked on offshore vessels doing oil spill recovery work. The employees worked 14-day hitches on board the vessels. Throughout the hitches, they worked 12-hour shifts. During their 12 “off-duty” hours, they were free to leave the ships and engage in personal activities. However, they were on call 24 hours a day in case they needed to respond to emergency oil spills. While off-duty, they were required to carry a cell phone or pager and be able to return to the ship within 30-45 minutes in case of an emergency call. The employees were prohibited from consuming alcohol at any time during the 14-day hitches. The employer provided sleeping quarters for the employees on the ships, and the employees were required to sleep on board the ships. The employer designated eight hours of their 24-day as “sleeping time.”

On these facts, the First Appellate District found that the 12 off-duty hours were compensable hours worked. Applying the factors discussed in Morillion and Madera, the court concluded that the employer exercised such a high degree of control over the crew members during their off-duty standby time that this time constituted hours worked within the meaning of the applicable wage order, Wage Order No. 9. The court went on to hold, however, that the employer was required to compensate the employees only for four of their 12 off-duty hours in each workday. Interpreting and applying the D.L.S.E.’s enforcement position on sleep time, the court found that Wage Order No. 9 permits an employer to have an agreement with its employees to exclude pay for up to eight hours of sleep time in a 24-hour period where the employer provides adequate sleeping facilities and employees usually can enjoy an uninterrupted night’s sleep. The court found these factors to exist here, despite the absence of a signed, written agreement between the employer and its employees to exclude the sleep time from their pay arrangement.

C. Training Time

1. Federal Law

Attendance at lectures, meetings, training programs, and similar activities need not be counted as working time if all of the following criteria are met:

1. Attendance is outside of the employee’s regular working hours;

2. Attendance is in fact voluntary;

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3. The course, lecture, or meeting is not directly related to the employee’s job (training is directly related to the job if it is designed to make the employee handle the job more effectively, as distinguished from training the employee for another job or in a new or additional skill); and

4. The employee does not perform any productive work during his or her attendance.

29 C.F.R. § 785.27 (2001).

Attendance is not voluntary if the employee is led to believe that his or her working conditions or continuance of employment would be adversely affected by nonattendance. Id. § 785.28. If an employee on his or her own initiative attends an independent school, college, or trade school after hours, the time does not count as hours worked for the employer even if the courses are related to the employee’s job. Id. § 785.30.

There is an exception to this general rule for an employer that establishes for the benefit of its employees a program of instruction that corresponds to courses offered by independent bona fide institutions of learning. Voluntary attendance by an employee at such courses outside of working hours would not be hours worked even if it was directly related to the employee’s job, or paid for by the employer. In rare circumstances, even involuntary attendance at such programs of instruction may not be counted as hours worked. Id. § 785.31.

2. California Law

California law and federal law are the same with respect to the compensability of training time. See 2002 D.L.S.E. Manual §§ 46.6.5-46.6.8.

D. Travel Time

1. Federal Law

The Portal-to-Portal Act provides that no employer shall be liable for the failure to pay the minimum wage or overtime compensation for time spent in walking, riding, or traveling to and from the actual place of performance of the employee’s principal activity or activities, either prior to the commencement of the workday or subsequent to the time on the workday at which the employee ceases the principal activity or activities, unless that time is made compensable by express contract or by custom or procurement not inconsistent with an express contract. 29 U.S.C. §§ 254(a)(1), (b); 29 C.F.R. § 785.34 (2001). Thus, certain travel time at the commencement or cessation of the workday, which originally was considered working time under the F.L.S.A. (such as walking from time clock to workbench), need not be counted as working time unless it is compensable by contract, custom, or practice. 29 C.F.R. § 785.34 (2001).

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Some states (such as California) have never adopted a similar provision. Thus, activities that are not compensable work under the Portal-to-Portal Act (such as preliminary and postliminary activities) nevertheless may be compensable under state law.

a. Ordinary Travel Between Home and Work

Normal travel time to and from work from the employee’s home is not considered hours worked for purposes of the F.L.S.A. regardless of whether the employee works at a fixed location or at different job sites, even if the employer agrees to pay for the time. Id. §§ 785.34, .35. Travel need not occur frequently in order to be “normal” or “ordinary.” E.g., Imada v. City of Hercules, 138 F.3d 1294, 1297 (9th Cir. 1998) (travel to mandatory off-site training occurring only a few times a year is noncompensable home-to-work travel, even though that time exceeds the employee’s regular commute).

b. Emergency Travel Between Home and Work

There is an exception to the general rule that travel time between home and work is not hours worked if an employer calls an employee who has returned home after his or her work day to travel a substantial distance to perform an emergency job for one of the employer’s customers. However, the D.O.L. has elected not to take a position on whether travel to and from work by an employee who receives an emergency call outside of regular hours to report back to his or her regular place of business to do a job constitutes hours worked. 29 C.F.R. § 785.36 (2001).

c. Special One-Day Assignments in Another City

If an employee regularly works at a fixed location in one city and receives a special one-day work assignment in another city, the travel time involved from the point of departure or arrival (e.g., railroad depot or airport) to the location of the special assignment is considered work time. The employee’s travel time from home to the point of departure, and any meal periods, are excludable. Id. § 785.37.

d. Travel That Is Part of Work

Time spent by an employee in travel as part of his or her principal activity, such as traveling to different job sites during the workday, or reporting to meeting places to receive instructions, perform work, or pick up tools, is part of the day’s work, and must be counted as hours worked regardless of contract, custom, or practice. Id. § 785.38.

e. Travel Away From Home Community

Travel that keeps an employee away from home overnight is work time when it cuts across the employee’s regular workday and corresponding hours on nonworking days, excluding regular meal periods. Thus, if an employee regularly works from 9 a.m. to 5 p.m. on Monday through Friday, travel time during these hours is work time on the weekends as well as on the other days. As an enforcement policy, however, the D.O.L. will not consider

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as hours worked time an employee spends in travel away from home as a passenger on an airplane, train, boat, bus, or automobile outside of regular working hours. If the employee is offered public transportation but requests permission to drive his or her car instead, the employer may count as hours worked either the actual time spent driving the car or the time that would have been consumed during working hours if the employee had used the public conveyance. Id. §§ 785.39, 40.

f. Work Performed While Traveling

Any work that the employee is required to perform while traveling must be counted as hours worked. An employee who operates a vehicle, boat, or airplane, or who is required to ride along as an assistant or helper, is considered to be working except during bona fide meal periods or when he or she is permitted to sleep in adequate facilities furnished by the employer. Id. § 785.41.

g. Continuous Workday Rule

Because donning and doffing special protective gear that is “integral and indispensable” to employees’ work is a “principal activity,” the continuous workday rule mandates that the time spent walking to and from the production floor after donning and before doffing the gear, as well as the time spent waiting to doff, are compensable under the F.L.S.A. IBP, Inc. v. Alvarez, 546 U.S. 21, 28 (2005). Under the “continuous workday rule, . . . the ‘workday’ is generally defined as the period between the commencement and completion on the same workday of an employee’s principal activity or activities. 29 C.F.R. § 790.6(b).” Id. at 13. However, the time employees spend waiting to don the first piece of gear that marks the beginning of the continuous workday is not compensable. Id. at 36.

2. California Law

a. Ordinary Travel Time

Under California law, “[i]f an employee is required to report to the employer’s business premises before proceeding to an off-premises work site, all of the time from the moment of reporting until the employee is released to proceed directly to his or her home is time subject to the control of the employer, and constitutes hours worked.” 2002 D.L.S.E. Manual § 46.2; Morillion, 22 Cal. 4th at 584.

In Morillion, the California Supreme Court held that the federal and state standards for determining compensable time are not the same. 22 Cal. 4th at 588. However, the implications of Morillion are uncertain. Certainly the absence of a Portal-To-Portal Act under California law will create “hours worked” in this state that will not exist elsewhere. Nonetheless, the D.L.S.E. historically has interpreted California law regarding ordinary travel to and from work as being consistent with federal law and, thus, not compensable. The fact that the employee commutes in a vehicle owned, leased, or subsidized by the employer and

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used for the purpose of ridesharing, as defined in Vehicle Code section 522, does not alter this rule. Cal. Lab. Code § 510 (West Supp. 2001).

A California court of appeal has rejected a plaintiff’s claim that his employer was required to compensate employees for the time they spent waiting for and riding shuttle buses between a remote parking lot and the employer’s entrance gates. In Overton v. Walt Disney Co., 136 Cal. App. 4th 263, 38 Cal. Rptr. 3d 693 (2006), Walt Disney Company required certain Disneyland employees, when they drove their cars to work, to park their vehicles in a satellite parking lot located approximately one mile away from the entrance to the park. Disney provided shuttle service between the parking lot and the park entrance. Disney did not require employees to drive to work, nor did it require them to use the shuttle bus. It merely required that, if they chose to drive, they park their vehicles in the satellite lot. A Disney employee brought a class action complaint, alleging that Disney was improperly failing to compensate them for this shuttle time. However, the court found these facts to be distinguishable from Morillion, because Disney did not require its employees to use the shuttles. In this regard, the court noted that many Disneyland employees took alternative forms of transportation to work, such as public transportation or vanpools, enabling them to bypass the satellite parking lot. Consequently, the court found the shuttle time to be outside the employer’s “control” and thus non-compensable.

Rutti v. Lojack Corp., 596 F.3d 1046, 1057-1058 (9th Cir. 2010), a Ninth Circuit case interpreting state law, is an interesting case of first impression arguably, and resulted in two decisions. In Rutti, the plaintiff sought to bring a wage and hour class action under the F.L.S.A. and California state law. Rutti brought the lawsuit on behalf of all roughly 450 technicians employed by Lojack across the country who install and repair vehicle recovery systems in customers’ cars. Most, if not all, of the installations and repairs were done at the clients’ locations and Rutti and the other technicians were required to travel to the job sites in a company-owned vehicle. Lojack paid technicians, like Rutti, on an hourly basis for the time period beginning when they arrived at their first job location and ending when they completed their final job installation of the day.

Rutti argued that he (and the other technicians) should be paid for the time they spent on pre-commute and post-commute activities performed at their homes. Specifically, Rutti argued that the time he spent at home, before the workday began (logging onto the handheld computer device that Lojack provided him in order to get job assignments for the day and to map and prioritize his routes that day) was compensable work time. He also argued that the time spent at the end of the day, when he returned home and was required to send a transmission to Lojack was compensable. When the technicians returned home for the day, they were required to send a transmission to Lojack using a portable data terminal (PDT) which informed the company about the jobs they had completed that day. This involved connecting the PDT to a modem, scrolling down a menu on the PDT until he found the option labeled “transmit,” and then selecting that option to initiate the upload process. The transmissions had to be done at home because it required the use of the modem provided by Lojack. Rutti was required to make sure that the transmission was successful, and there is evidence in the record that it often took more than one attempt to

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successfully complete a transmission, and some evidence it took five to ten minutes to make the transmissions, although also shorter in some instances. Rutti also argued that he should be paid for the time he spent commuting each day from home to work (the first customer job site) and from the last customer site back home. Rutti argued that because his “work” really began (and ended) at home each day, his entire commute time was compensable under the continuous workday rule.

The district court granted Lojack summary judgment, holding that as a matter of law that Rutti’s at home preliminary and postliminary activities were not compensable because they either were not integral to Rutti’s principal activities or they were de minimis. The district court also held that Rutti’s commute time was not compensable under federal or state (California) law.

On appeal to the Ninth Circuit, a three-judge panel in August 2009 affirmed in part and vacated in part the summary judgment. See Rutti, v. LoJack, 578 F.3d 1084 (9th Cir. 2009), op. withdrawn and superceded, 596 F.3d 1046 (9th Cir. 2010). First, the court said that the pre-shift activities of “receiving mapping and prioritizing jobs and routes for assignments” were not integral to Rutti’s principal activities – installing. Id. at 1096. Instead, they related to his commute – and under the F.L.S.A., commuting time is presumptively noncompensable. Id. In addition, the court found that to the extent the pre-shift activities were related to his principal activities, they were de minimis. Id. As for the post-shift PDT transmission activity, the court found that this activity was integrally related to Rutti’s principal activity (work time), and that there was a material issue of fact as to whether the activity was de minimis. Id. at 1096-97. So, it vacated summary judgment as to that off-the-clock issue. Id. at 1097-98. Finally, the court rejected Rutti’s argument that the continuous workday rule made the commute time compensable and affirmed summary judgment on this ground for Lojack. Id. at 1098-99. Even though the time spent after the workday sending the PDT transmission was integrally related to Rutti’s principal activities, the court found that this time did not extend his compensable workday to include his commute time. Id. The court hinged its analysis on the fact that Lojack gave Rutti and other technicians a 12 hour period within which to make the transmissions – from 7 pm to 7 am. Id. There was no requirement that the transmission occur immediately after the commute ended. Id. To the contrary, the court stated that from the moment Rutti completed his last installation of the day, he was completely relieved of all duty. Id. His only restriction was that sometime during the night he had to complete the PDT transmission. Id. Because he had hours within which to complete the transmission, he could effectively use the time for his own personal purposes; no continuous workday rule applied. Id.

The Ninth Circuit subsequently withdrew that decision, and in March 2010, the same three judge panel reissued a new opinion. See Rutti v. Lojack Corp., Inc., 596 F. 3d 1046 (9th Cir. 2010). First, the three judges continued to agree that Rutti’s pre-commute home activities (checking work assignments and mapping routes) were not compensable. Id. at 1057-58. The judges agreed that such activities were not integral to his principal activity and – even if they were – the time spent was de minimis and not compensable. Id. With regard to the post-commute PDT transmissions, the judges could not agree. Id. at 1058-59, 1062-

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64. Two judges concluded it was not clearly de minimis; the other judge vigorously disagreed. Id. The judges applied the same Lindow factors, but came out with different conclusions. None of the judges disputed the regularity of the transmissions – every day. For the dissenting judge, the limited amount of time spent (a few minutes), and the practical administrative difficulties caused her to conclude it was exactly the kind of case where the de minimis rule should be applied; she was out-voted, so summary judgment remained vacated on that off-the-clock issue of the case. As for the commute issue, the opinion changed. All the judges continued to agree that commuting time was not compensable under federal law, based on the Portal-to-Portal Act and also the federal Employee Commuting Flexibility Act (“ECFA”). Id. at 1054. But, a majority (two judges) concluded that the commute time was compensable under California law. Id. at 1061-62.

Why is the commute time compensable under California law and not federal law? A key reason is that in California, there is no Portal-to-Portal Act (or ECFA). For the majority in the 2010 Rutti opinion, it is the existence of Morillion – and the fact that during the commute from home to the first job site Rutti was subject to the control of his employer – that rendered the commute time compensable:

Rutti was required to drive the company vehicle, could not stop off for personal errands, could not take passengers, was required to drive the vehicle directly from home to his job and back, and could not use his cell phone while driving except that he had to keep his phone on to answer calls from the company dispatcher. . . . There is simply no denying that Rutti was under Lojack’s control while driving the Lojack vehicle en route to the first Lojack job of the day and on his way home at the end of the day.

596 F.3d at 1061-62 (emphasis in original).

b. Extended Travel Time

One recognized critical difference between federal and California law pertains to the compensability of time spent in extended (i.e., overnight) travel. According to the 2002 D.L.S.E. Manual, the D.L.S.E. interprets California law to require that time spent traveling during either regular working hours or in addition to regular working hours be counted as hours worked if the travel is done pursuant to the employer’s instructions. The compensable time for extended travel does not begin until such travel time exceeds ordinary commute time. Thus, “[i]f the employee’s travel to and from his home to the airport is the same or substantially the same as the distance (and time) between his home and usual place of reporting for work, the travel time would not begin until the employee reached the airport.” Id. § 46.3.1. At that point, however, “[t]he employee must be paid for hours spent between the time he arrives at the airport and the time he arrives at his hotel.” Id.

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The 2002 D.L.S.E. Manual makes a distinction between travel time and time spent taking a break from travel. Travel time is compensable, regardless of how the employee spends his or her time while traveling. On the other hand, “time spent taking a break from travel in order to eat a meal, sleep, or engage in purely personal pursuits not connected with traveling or making necessary travel connections (such as, for example, spending an extra day in a city before the start or following the conclusion of a conference in order to sightsee) is not compensable.” Id. § 46.3.1. For example, an employee who takes a nap on a required flight from New York to Tokyo must be paid for that time, while an employee who engages in purely personal pursuits during an optional stop-over in San Francisco need not be compensated for the time devoted to those personal pursuits.

c. Different Rate for Travel Time

Although extended travel time is compensable, an employer need not necessarily compensate an employee for travel time at his or her regular rate of pay. An employer may establish a different pay scale for travel time, so long as that rate is no less than the minimum wage rate and the employee is informed of the different pay rate before travel begins. “For purposes of determining the regular rate of pay for overtime work where a different rate is applied to travel time, the State of California adopts a ‘weighted average’ method.” Id. § 46.3.2.

E. Meal and Rest Periods

1. Federal Law

Meal periods are not hours worked as long as the employee is relieved of his or her duties. Meal periods may be excluded from the calculation of “hours worked” even without requiring the employee to leave the premises. See 29 C.F.R. § 785.19(b) (2001); Marti v. Grey Eagle Distribs., Inc., 937 F. Supp. 845, 850-52 (E.D. Mo. 1996) (thirty-minute break period not compensable where employees were not asked to perform work and only restriction was that they stay on-premises).

In determining whether a meal period is compensable, the standard courts apply is whether the employee’s time is spent predominantly for the benefit of the employer. See Reich v. S. New England Telecommc’ns Corp., 121 F.3d 58, 64 (2d Cir. 1997). Thus, compensation is not required for a meal period when “‘the employee can use the time effectively for his or her own purposes.’” Bernard v. IBP, Inc., 154 F.3d 259, 266 (5th Cir. 1998) (citation omitted).

Courts determine whether an employee can use the time effectively, for his or her own purposes, by examining: (1) the restrictions placed upon the employee; (2) the extent to which these restrictions benefit the employer; (3) the duties of the employee during the meal period; and (4) the frequency of interruption. Id.; Roy v. Cnty. of Lexington, 141 F.3d 533, 545-46 (4th Cir. 1998).

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Nothing in the F.L.S.A. requires an employer to provide employees with rest breaks.

2. California Law

a. General Rule

An employer may not employ an employee for a work period of more than five hours without “providing” a meal period of at least thirty minutes,2 unless the employee’s workday will be completed in less than six hours and the meal period is waived by mutual consent of the employer and the employee. E.g., Cal. Lab. Code § 512(a); I.W.C. Wage Order No. 4-2001(11)(A)-(B); 2002 D.L.S.E. Manual § 45.2.3 An employer may not employ an employee for a work period of more than ten (10) hours per day without providing the employee with a second meal period of not less than 30 minutes, except that if the total hours worked is no more than 12 hours, the second meal period may be waived by mutual consent of the employer and the employee only if the first meal period was not waived. Id. Neither the Labor Code nor the wage orders define what it means to “provide” a meal period.

An employer who fails to provide a meal period to an employee as required by the applicable wage order is liable to the employee for one additional hour of pay per day of violation. Cal. Lab. Code § 226.7.

b. The Brinker Decision

In April 2012, the California Supreme Court issued its long-awaited, highly-anticipated decision in Brinker Restaurant Corp. v. Superior Court (Hohnbaum), 53 Cal. 4th 1004, 139 Cal. Rptr. 3d 315 (Apr. 12, 2012). The Court unanimously ruled that the obligation to “provide” a meal period does not mean “ensuring” that an employee actually takes it. The Court also clarified that the duty to provide a second meal period arises only after 10 hours of work, rejecting the plaintiffs’ “rolling-five-hour” theory.

(1) The meaning of “provide”

After extensively analyzing the legislative history of the wage orders and Labor Code, the Court concluded that an employer satisfies its duty to “provide” a meal period if “it relieves its employees of all duty, relinquishes control over their activities and permits them a reasonable opportunity to take an uninterrupted 30-minute break, and does not impede or discourage them from doing so.” 139 Cal. Rptr. at 343. This means the employee “(1) has

2 Pursuant to an amendment to Labor Code section 514, effective January 1, 2002, the meal period requirements now apply to employees under a collective bargaining agreement. 3 Effective July, 2002, the Manufacturing Industry Wage Order (1-2001) was amended to provide that, “[i]n the case of employees covered by a valid collective bargaining agreement, the parties to the collective bargaining agreement may agree to a meal period that commences after no more than six (6) hours of work.”

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at least 30 minutes uninterrupted, (2) is free to leave the premises, and (3) is relieved of all duty for the entire period.” Id. at 340.

The Court rejected the plaintiffs’ argument that “provide” imposes an additional requirement: to “ensure” that employees take their meal breaks – to, in essence, prohibit employees from performing any work during a meal period. The Court found there was no textual basis for that argument in the Wage Order or the statute. Consequently, an employer is “not obligated to police meal breaks” and ensure that no work is performed. Rather, once the employer has relieved its employee of all duty, the employee is at liberty to use the meal period for whatever purpose he or she desires. “[W]ork by a relieved employee during a meal break does not thereby place the employer in violation of its obligations and create liability for premium pay.” Id. at 343.

The Court made clear, however, that an employer may not undermine its policy of providing meal breaks by pressuring employees to perform their duties in ways that omit breaks – for example, by scheduling work in a way that makes taking breaks extremely difficult or creating incentives for employees to forego breaks. Id.

(2) Timing of first and second meal periods

The Court clarified that employers must provide the first meal period so that it starts by the end of the fifth hour of work. In other words, if an employee starts work at 8 a.m., the first meal period must start by no later than 1 p.m. On this point, the Court rejected the employer’s argument that for employees who work shifts exceeding five hours, an employer may provide the opportunity to take the break at any time, including in the sixth hour. As mentioned above, however, the duty to “provide” the meal break by the end of the fifth hour does not mean ensuring that the meal actually is taken then.

Importantly, the Court also cleared up the longstanding confusion over the timing of the second meal period. It squarely rejected the plaintiffs’ “rolling five” argument, under which an employer would be required to provide a second meal no later than five consecutive hours after the end of the first meal, even if that occurs before the 10th hour of work. Instead, the Court followed the plain language in Labor Code section 512, ruling that an employer need not provide a second meal period until the end of the 10th hour of work, for employees who work more than 10 hours in a day, regardless of when the employees finished their first meal period. Even then, as the statute states, employees may waive the second meal period, with the consent of the employer, if they did not waive the first meal period and they do not work more than 12 total hours in the workday. Cal. Lab. Code §512(a).

(3) Rest period rules

The wage orders provide that every employer “shall authorize and permit all employees to take rest periods, which insofar as practicable shall be in the middle of each work period. The authorized rest period time shall be based on the total hours worked daily

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at the rate of ten (10) minutes net rest time per four (4) hours or major fraction thereof,” except that a rest period need not be authorized for employees whose total daily work time is less than three and one-half hours. E.g., Wage Order No. 2001-4, subdivision 12. The failure to authorize and permit a rest break entitles an employee to a premium equivalent to one hour’s pay per day of violation. Cal. Lab. Code § 226.7.

The Brinker Court clarified that “major fraction” of four hours means “any amount of time in excess of two hours.” 139 Cal. Rptr. at 334. The Court thus used a simple mathematical formula to determine the amount of rest time due on any given day: “the number of hours worked divided by four, rounded down if the fractional part is half or less than half and up if it is more (a ‘major fraction’), times ten minutes.” Id. Applying this formula, employees are entitled to 10 minutes’ rest for shifts from three and one-half to six hours in length, 20 minutes for shifts of more than six hours up to 10 hours, 30 minutes for shifts of more than 10 hours up to 14 hours, and so on. Id.

On the issue of rest period timing, the Court rejected the plaintiffs’ argument that an employee’s first rest break always must precede the meal period. The Court noted, as an example, that an employee who works a six-hour shift would be entitled to one rest break and one meal break, and, if one of the breaks is taken at the two-hour point and the other at the four-hour point, it ought not matter which type of break comes first.

(4) Class certification rulings

The Brinker decision also contains important rulings on class certification issues relating to meal and rest break claims, as well as off-the-clock claims. First, as a matter of class action procedure, the Court made clear that a trial court is not necessarily required to resolve all disputed threshold legal or factual questions before deciding a class certification motion, as the Court of Appeal below had held. However, the Court acknowledged that “issues affecting the merits of a case may be enmeshed with class action requirements,” and thus courts may properly evaluate evidence or legal issues that are germane to both certification and the merits. Id. at 329.

Based on this framework, the Court resolved the class certification issues as follows:

Meal Period Claim. The meal period class certified by the trial court included employees who had not received meal periods on a “rolling-five-hour” basis and, thus, the class was over-inclusive in light of the Supreme Court’s rejection of this theory of recovery. Therefore, the Court remanded the certification of the meal period class to the trial court for reconsideration, applying the Court’s new “provide” standard, because the class definition “embraces individuals who now have no claim against Brinker.” Id. at 351.

Rest Break Claim. The Supreme Court reversed the Court of Appeal and affirmed the trial court’s certification of a rest period class, but it did so under the unique factual circumstances of the case. The Court found that certification of a rest break class was appropriate under the theory that “Brinker adopted a uniform corporate rest break policy

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that violates Wage Order No. 5 because it fails to give full effect to the ‘major fraction’ language” of the wage order. Id. at 337. Brinker’s written policy informed employees that they were entitled to a rest break for each four hours that they work, without mentioning “or major fraction thereof.” According to the Court, this created a class-wide issue of whether Brinker authorized and permitted sufficient rest periods (for example, a second rest break after six hours of work). The fact that employees could choose not to take breaks did not create individualized issues where the employer gave them no choice in the first instance. Here, Brinker conceded the existence of its common and uniform rest break policy, which the Court found was sufficient to create a class issue, particularly given that the plaintiffs had supplied some evidence that rest breaks were not always permitted.

Off-the-Clock Claim. The plaintiffs asserted a claim that they were unlawfully required to work off-the-clock, mainly during the times they allegedly were being denied meal breaks. The Supreme Court agreed with the Court of Appeal that the trial court had abused its discretion in certifying an off-the-clock subclass. It found that plaintiffs had not produced substantial evidence of a systematic company policy to pressure or require employees to work off the clock; to the contrary, Brinker’s written policy specifically prohibited employees from working off the clock for any reason. Thus, the Court found a lack of common proof of an off-the-clock violation and found instead that individual issues predominated.

As a consequence of the Court’s rulings in Brinker, plaintiffs should have more difficulty obtaining class certification of meal and rest break claims, absent proof of a specific employer policy or class-wide practice that makes timely, off-duty meal or rest periods unavailable.

This has already proven to be the case in two decisions from the Second Appellate District. In Lamps Plus Overtime Cases, 209 Cal. App. 4th 35, 41, 50 (2012), the court reiterated that Brinker held that employers need only provide, not ensure meal and rest breaks, and affirmed the trial court’s denial of class certification. Here, the employer’s company-wide policy was to require that meal breaks be taken and to authorize or permit rest breaks. Id. at 41-42. Plaintiff’s counsel distributed a questionnaire to a sampling of putative class members, asking whether they had missed meal and rest breaks. Id. at 44. The questionnaire responses, declarations, and depositions of putative class members showed wide variation in whether they had received their meal and rest breaks; therefore, the court held that plaintiffs failed to demonstrate a common practice or policy. Id. at 54. The court further rejected plaintiffs’ theory that chronic understaffing led to class wide violations of the meal and rest period law. Id.

The court also denied certification of plaintiff’s off-the-clock claim. Even though over half of the questionnaires indicated that Lamps Plus had required the responding employee to work off-the-clock, almost half reported no off-the-clock work. Id. at 56. “With almost as many employees reporting they were not required to work off the clock as those who claimed they were, the evidence does not lead to an inference there was a companywide policy requiring such work.” Id. Furthermore, the three named plaintiffs were

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inadequate class representatives for a variety of reasons, including one plaintiff’s criminal history and another’s poor memory. Id. at 59.

In Hernandez v. Chipotle Mexican Grill, Inc., 208 Cal. App. 4th 1487, 1490 (2012), the court again held that the trial court did not abuse its discretion in denying class certification of meal and rest break claims. Chipotle had a company-wide policy of mandating paid meal breaks and providing paid rest breaks. Id. at 1491. The declarations of putative class members submitted to the court showed wide variations in whether and the frequency with which their breaks were denied or interrupted. Id. at 1501. Chipotle’s time records were not reliable, because Chipotle paid employees for breaks, and so employees had no incentive to clock in and out properly. Id. at 1502. While plaintiff’s statistics expert contended that based on his analysis of Chipotle’s time records, ninety-two percent of employees missed at least one meal break, and eighty-eight percent of employees had missed at least one rest break, id. at 1493, the court found that the time records could not prove that Chipotle failed to provide breaks on a class-wide basis, id. at 1502-03. Even if a time record showed that an employee did not take a break, a trier of fact would need to determine the reason why the break was missed—for example, if the employee willingly decided to skip a break, Chipotle would not be liable. Id. at 1504. Therefore, individual issues predominated. Moreover, the potential for conflicts of interest among the putative class weighed against class certification. Some putative class members were responsible for providing meal and rest breaks for others, and therefore some putative class members could accuse other putative class members of violating their meal and rest period rights. Id. at 1504.

c. Meal and Rest Break Premiums

Since January 1, 2001, employers have been required to pay a meal period premium equivalent to one hour’s pay at the employee’s regular rate for each work day that an uninterrupted 30-minute meal period is not provided. This hour of compensation does not count towards overtime. Cal. Lab. Code § 226.7; I.W.C. Wage Order No. 4-2001(11)(B).

As long as the employee is relieved of all duty during the meal period, it is not counted as hours worked. If an employer does not relieve an employee of all duty during the required thirty-minute meal period, the time spent working during the meal period must be compensated. E.g., I.W.C. Wage Order No. 4-2001(11)(A); see also 2002 D.L.S.E. Manual § 45.2. An “on-duty” meal period is permitted under the wage orders only when the nature of the work prevents an employee from being relieved of all duty and a written agreement between the parties provides for a paid on-duty meal period that the employee may revoke at any time. E.g., I.W.C. Wage Order No. 4-2001(11)(A). If the conditions apply for a lawful on-duty meal period, the employer must compensate for the meal period time, but it does not owe an additional hour of pay as a meal period premium.

The meal period also will be counted as hours worked when an employee is relieved of all duties but is not free to leave the work place during the time allotted for a meal. Under these circumstances, the D.L.S.E. takes the position that the meal period is on-duty time subject to the control of the employer. See 2002 D.L.S.E. Manual § 46.5; Bono Enters., Inc. v.

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Bradshaw, 32 Cal. App. 4th 968, 978-79, 38 Cal. Rptr. 2d 549 (1995) (refusing to apply the Madera standard with regard to time during which employee is required to remain on premises and upholding D.L.S.E. meal-period enforcement policy that requires all such meal periods to be counted as “hours worked”), disapproved of on other grounds, Tidewater, 14 Cal. 4th at 573-74.

Employees in California also are entitled to a rest period of a net ten minutes for every four hours worked or major fraction thereof. Employers must “authorize and permit” employees to take rest periods, which insofar as practicable shall be in the middle of each work period. A rest period need not be authorized for employees whose total daily work time is less than three and one-half hours. Rest periods count as hours worked and must be compensated. E.g., I.W.C. Wage Order No. 4-2001(12). If an employer fails to provide rest breaks in accordance with the applicable Wage Order, it must pay the employee one hour’s pay at the employee’s regular rate of compensation for each workday that one or more rest periods are not provided. Id. The maximum rest break premium is one hour’s pay per day regardless of the number of rest break violations that occur in the day.

In United Parcel Service v. Superior Court, 196 Cal. App. 4th 57, 125 Cal. Rptr. 3d 384 (June 2, 2011), the court of appeal for the Second Appellate District ruled that Labor Code section 226.7 permits a maximum of two premium payments per work day: one for failure to provide a meal period and another for failure to provide a rest period. The court, in reaching this determination, relied on the statutory language of section 226.7, the legislative and administrative history of the statute and the IWC wage orders, the public policy behind the statute and wage orders, and the principle that Labor Code provisions should be broadly construed in favoring of protecting employees. Thus, the court reached a middle ground result, rejecting the employer’s argument that employers owe only one combined premium per employee in a day rather than two, but also rejecting the contrary argument long advanced by the plaintiffs’ bar that there is no limit on the number of meal and rest break premiums an employee may recover in a day if the employer has committed multiple meal and/or rest break violations in the day.

California’s meal and rest period rules have engendered considerable litigation, including class action litigation, as a result of the enormous potential liability that can result from the imposition of meal or rest break premiums. On April 16, 2007, the California Supreme Court settled the controversy as to whether meal and rest break premiums should be characterized as “wages” or as a “penalty.” Murphy v. Kenneth Cole Prods., Inc., 40 Cal. 4th 1094, 56 Cal. Rptr. 3d 880 (2007). The Supreme Court held that the meal and rest beak premiums constitute “wages” and are therefore governed by a three-year statute of limitations.

The California Supreme Court has also addressed the question of whether a prevailing party – whether it be the plaintiff or the employer – may recover its reasonable attorney’s fees if it prevails on a claim for recovery of meal or rest break premiums under Labor Code section 226.7. In Kirby v. Immoos Fire Protection, Inc., 53 Cal. 4th 1244 (April 30, 2012), the Supreme Court overturned an award of attorneys’ fees granted to an employer

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that had prevailed on a rest break claim. The fee award had been made under Labor Code section 218.5, which requires the awarding of attorney’s fees to the prevailing party in “any action brought for the nonpayment of wages.” The employer argued that Section 218.5 applies to a meal or rest break claim in light of the Supreme Court’s prior ruling in Murphy that meal and rest premiums are “wages.” The Kirby court ruled, however, that a suit for meal or rest break premiums is not fundamentally a suit for nonpayment of wages – even though the remedy for a violation includes the payment of wages – but rather it is a suit for being deprived of meal periods or rest breaks. Therefore, the prevailing party is not entitled to attorneys’ fees under Section 218.5, whether the prevailing party is the employee or the employer.

Importantly, the Supreme Court in Kirby also ruled that prevailing employees in a meal or rest break suit are not entitled to recovery of their attorneys’ fees under a different provision, Labor Code section 1194, which allows a prevailing plaintiff to recover attorneys’ fees in a suit claiming that an employee received “less than the legal minimum wage or the legal overtime compensation applicable to the employee.” The Court found that a meal or rest break claim is not a suit for recovery of the minimum wage or overtime.

In Aleman v. Airtouch Cellular, 209 Cal. App 4th 556, 583 (2012) (discussed below in connection with reporting time pay and split shift premiums), on remand from Kirby, the court ruled that a claim for reporting time pay is subject to Labor Code 218.5, and thus a prevailing defendant can recover fees. However, a claim for split-shift premiums is one brought to recover unpaid minimum wage compensation and therefore subject to Labor Code 1194, and so a prevailing defendant cannot recover its fees on that claim. Id. at 582.

d. California Workers Exempted From Meal Period Rules

(1) Collective Bargaining Agreement Requirement

Subsection (e) of Labor Code section 512 provides an exception for certain employees covered by collective bargaining agreements as follows:

(e) Subdivisions (a) and (b) do not apply to an employee specified in subdivision (f) if both of the following conditions are satisfied:

(1) The employee is covered by a valid collective bargaining agreement.

(2) The valid collective bargaining agreement expressly provides for the wages, hours of work, and working conditions of employees, and expressly provides for meal periods for those employees, final and binding arbitration of disputes concerning application of its meal period provisions, premium

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wage rates for all overtime hours worked, and a regular hourly rate of pay of not less than 30 percent more than the state minimum wage rate.

(2) Categories Of Workers Covered By The Section 512 Carve Out

Subsection (f) identifies the categories of workers (construction workers, commercial drivers, security officers, and gas and electrical company workers) who are carved out of the statutory meal period rules if they meet the collective bargaining requirements:

(f) Subdivision (e) applies to each of the following employees:

(1) An employee employed in a construction occupation.

(2) An employee employed as a commercial driver.

(3) An employee employed in the security services industry as a security officer who is registered pursuant to Chapter 11.5 (commencing with Section 7580) of Division 3 of the Business and Professions Code, and who is employed by a private patrol operator registered pursuant to that chapter.

(4) An employee employed by an electrical corporation, a gas corporation, or a local publicly owned electric utility.

Subsection (g) provides the technical definitions of a “commercial driver,” a “construction occupation,” an “electrical corporation,” a “gas corporation,” and a “local publicly owned electrical utility.”

F. Rounding

1. Federal Law

Employers are permitted to round an employee’s starting time and stopping time to the nearest 5 minutes, or to the nearest one-tenth or quarter of an hour, as long as it does not result, over a period of time, in failure to compensate the employees properly for all the time they have actually worked. 29 C.F.R. § 785.48(b).

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2. California Law

A number of cases have involved the issue of rounding under California law. In Hightower v. JP Morgan Chase, N.A., CV 11-1802 PSF (PLAx) (C.D. Cal. Sept. 12, 2012), plaintiffs alleged Chase Bank used an accounting system in which it converted the number of minutes employees worked into a fraction of an hour, then converted that fraction to a decimal system, which was rounded up or down to the nearest hundredth. For example, twenty minutes of work would be converted to the fraction 20/60, then converted to the decimal .33, with the infinitely repeating decimal rounded down to the nearest hundredth. Id. at 2. Plaintiffs claimed that the rounding system violated the F.L.S.A. and the California Labor Code by failing to pay employees for all time worked. Id. Defendant moved to dismiss this allegation on the basis the rounding system had a mathematically equal probability of overpaying or underpaying employees, and that plaintiffs only alleged de minimis injuries, which are not recoverable. Id. at 3-4. However, the court did not reach the merits of the rounding claim, denying defendant’s motion to dismiss because it sought to dismiss specific allegations supporting plaintiffs’ claims, and not any of the claims themselves, and therefore should have been brought as a motion to strike. Id. at 4.

In Aleksick v. 7-Eleven, Inc., 205 Cal. App. 4th 1176 (2012), 7-Eleven provided payroll services to its franchisees. 7-Eleven’s payroll system converted an employee’s total number of hours and minutes worked to a total number of minutes, and divides that figure by 60 to convert the time to hours and hundredths of an hour. In a practice parties referred to as truncation, any numbers beyond the hundredth place were ignored. Id. at 1181. Plaintiff sued 7-Eleven for violation of California’s unfair competition law (“UCL”) based on this practice. Id. The trial court granted 7-Eleven’s motion for summary judgment, holding that the practice of truncation and the use of a decimal system rather than a fractional system were inherently reasonable and did not violate the UCL. Id. at 1183. The appellate court affirmed, but on different grounds. Plaintiff failed to provide a predicate for her claim of unlawfulness under the UCL, citing no specific statutes as having been violated in her complaint. In addition, the Labor Code wage statutes only govern the employer-employee relationship, and 7-Eleven was not the class members’ employer; thus, the unlawful conduct and unfair practice prongs of the UCL could not apply. Id. at 1190, 1193.

In See’s Candy Shops v. Superior Court, No. D060710, 2012 Cal. App. LEXIS 1132 (Oct. 29, 2012), See’s had a policy of rounding time punches up or down to the nearest-tenth of an hour; thus employees’ time punches were rounded to the nearest three-minute mark. Id. at *3-4. Under See’s separate grace period policy, employees could voluntarily punch in up to 10 minutes before their scheduled start time, and up to 10 minutes after their scheduled end time. Id. at *4. Employees were not permitted to work during the grace period. If an employee punched during the grace period, he or she was paid based on his or her scheduled start/stop time, rather than the punch time. Id.

Plaintiff brought a class action suit alleging See’s violated various California wage and hour laws because its rounding and grace period policies resulted in a failure to pay for all work performed and to provide accurate itemized wage statements. Id. at *5. The trial court

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granted plaintiff’s motion for summary adjudication on four of See’s affirmative defenses, including two related to the rounding policy. Id. at *19. The appellate court reversed.

Because there was no California statute or case law specifically authorizing or prohibiting time-rounding, the court looked to the federal regulatory standard, which permitted rounding and was used by the D.L.S.E. Id. at *23-24; see also D.L.S.E Manual §§ 47.1, 47.2. Federal courts had long interpreted the regulation to allow rounding as long as it did not “consistently result in a failure to pay employees for time worked,” such as where an employer’s rounding policy only rounded down. Id. at *25. Plaintiff argued that the federal regulation was inconsistent with section 204, contending that section 204’s requirement that “all wages” be due and payable twice monthly meant employers could use rounding only if they reconciled the rounding with actual time punches every two weeks. Id. at *30. The court rejected this: “[S]ection 204 does not provide for the payment of any wages nor create any substantive right to wages. The only right furthered by the section is the timely payment of wages.” Id. at *33 (citation omitted).

The court concluded that under California law, “an employer is entitled to use the nearest-tenth rounding policy if the rounding policy is fair and neutral on its face and ‘it is 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.’” Id. at *39 (quoting 29 C.F.R. § 785.48(b)). Here, See’s expert compared the actual unrounded time stamps and the rounded time stamps, and determined that rounding was neutral over time. Id. at *12-13. The court therefore found See’s had met its burden to show triable issues of fact as to whether its rounding policy was proper under California law, and ordered the trial court to enter an order denying plaintiff’s summary adjudication motion on See’s affirmative defenses related to its rounding policy. Id. at *42.

IV. DETERMINING THE REGULAR RATE OF PAY

A. General Rule

Under both federal and state law, the regular rate of pay includes all remuneration paid to or on behalf of a non-exempt employee, including hourly earnings, salary, piecework earnings, commission, bonus, and the value of meals and lodging, unless it falls within a statutory exclusion. See 29 U.S.C. § 207(e) (2001); 2002 D.L.S.E. Manual § 49.1.1. An employee’s regular rate of pay is always expressed as an hourly rate for determining overtime compensation. The method for determining this hourly regular rate of pay differs under federal and state law.

1. Federal Law

For hourly employees whose only compensation is based on an hourly rate of pay, the regular rate of pay is the hourly rate. See 29 C.F.R. § 778.110(a) (2001). If an hourly employee also receives other compensation in that workweek, such as a bonus or standby pay, the regular rate of pay is computed by dividing the total compensation (hourly rate plus,

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e.g., bonus) by the total number of hours worked in that workweek. Id. § 778.110(b). Overtime for salaried, nonexempt employees may be determined by calculating the weekly salary and dividing by the number of hours which the salary is intended to compensate. See id. § 778.113(a).

2. California Law

The regular rate of pay for hourly employees is the same under California law as under federal law. However, the method for determining the regular rate of pay for nonexempt salaried employees in California differs from federal law. In California, the regular rate of pay is computed by dividing an employee’s weekly remuneration by the maximum number of legal regular hours worked. Cal. Lab. Code § 515(d) (West Supp. 2001); see also 2002 D.L.S.E. Manual § 49.1.4; I.W.C. Wage Order No. 4-2001(3)(A)(1)(c). In other words, the regular rate of pay for salaried nonexempt employees will be deemed to be based on a forty-hour workweek - even if the employee worked more than forty hours that workweek - unless the agreed workweek is less than the legal maximum forty-hour workweek. 2002 D.L.S.E. Manual § 49.1.5.

B. Bonuses

1. Federal Law

a. General Rule

An employee’s regular rate does not include sums paid in recognition of services performed during a given period if both the fact that payment is to be made and the amount of the payment are determined at the sole discretion of the employer at or near the end of the period and not pursuant to any prior contract, agreement, or promise causing the employee to expect such payments regularly. Although excludable from the regular rate, such sums may not be credited toward overtime compensation due. 29 C.F.R. § 778.211(a) (2001).

b. Nondiscretionary Bonuses Not Excludable

If the employer promises in advance to pay a nondiscretionary bonus, the bonus may not be excluded from the regular rate. A bonus also will not qualify for exclusion from the regular rate if the employer abandons its discretion in regard to either the fact that payment will be made or the amount of the payment. Id. § 778.211(b).

c. Incentive or Production Bonuses Not Excludable

Bonuses that are announced to employees to induce them to work more steadily or efficiently, or to remain with the company, are included in the regular rate of pay. Bonuses based directly on attendance, individual or group production, or quality and accuracy of work; bonuses contingent on the employee’s continuing in employment until the time the

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payment is to be made; and similar types of bonuses are not discretionary bonuses and must be included in the regular rate of pay. Id. § 778.211(c).

d. Method of Computing Regular Rate Based on Nonexcludable Bonus

If a nonexcludable bonus covers only one weekly pay period, the amount of the bonus is merely added to the other includable earnings of the employee for that workweek and the total is then divided by the total hours worked to obtain the regular rate. Id. § 778.209(a).

Under many bonus plans, however, bonus calculations may necessarily be deferred over a period of time longer than a workweek. In such a case, the employer may disregard the bonus in computing the regular hourly rate until the time when the amount of the bonus can be ascertained, and then pay overtime compensation at one and one-half times the employee’s regular hourly rate, exclusive of the bonus. When the amount of the bonus can be ascertained, it must be apportioned back over the workweeks of the period during which it may be said to have been earned. The employee must then receive an additional amount of compensation for each workweek that he or she worked overtime during the period equal to one half of the increase in the hourly rate of pay allocable to the bonus for that week multiplied by the number of statutory overtime hours worked during the week. Id.

If it is impossible to allocate the bonus among the workweeks of the period in proportion to the amount of the bonus actually earned each week, some other reasonable and equitable method of allocation must be adopted. For example, under certain circumstances it may be reasonable and equitable to assume that the employee earned an equal amount of bonus each week of the period to which the bonus related, or each hour of the pay period, and to compute the additional overtime based on this assumption. Id. § 778.209(b).

In some instances, the bonus contract or plan may also provide for the simultaneous payment of overtime compensation due on the bonus that satisfies in full the overtime provisions of the F.L.S.A., making recomputation unnecessary. Such would be the case if, for example, a contract made prior to the performance of services provided for the payment of additional compensation in the way of a bonus at the rate of ten percent of the employee’s straight-time earnings, and ten percent of overtime earnings. Id. § 778.210.

2. California Law

California and federal law are the same regarding the treatment of bonus payments as includable within or excludable from the regular rate of pay. See 2002 D.L.S.E. Manual §§ 49.1.1-49.1.3. However, California law differs somewhat from federal law in how it requires an employer to compute the regular rate on some bonus payments. According to the D.L.S.E., if the bonus is a flat sum, such as $300 for continuing to the end of the season, the regular bonus rate is determined by dividing the bonus by the maximum legal regular

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hours worked during the period to which the bonus applies (usually 40 hours per week), rather than by the total hours worked, as is permitted under federal law. 2002 D.L.S.E. Manual § 49.2.4.2. Based on the D.L.S.E.’s enforcement position, the method for calculating overtime on a bonus thus depends upon whether it qualifies as a flat sum bonus (bonus amount is fixed independent of the hours worked) or a production bonus (amount of bonus increases with each worked). But, see Marin v. Costco Wholesale Corp., 169 Cal. App. 4th 804, 816, 87 Cal. Rptr. 3d 161 (2008) (calling into question the validity of the D.L.S.E.’s enforcement position on flat sum bonuses and upholding defendant’s decision not to use the “flat sum” bonus calculation, finding that the employer’s bonus was a “hybrid” (part flat rate and production bonus) and thus defendant’s calculation of overtime on the bonus did not require use of “flat sum” calculation in any event).

C. Gifts

1. Federal Law

An employee’s regular rate does not include sums paid as gifts, including payments in the nature of holiday gifts or on other special occasions, as a reward for service, the amounts of which are not measured by or dependent on hours worked, production, or efficiency. A payment will not be considered to be a gift or in the nature of a gift if: (1) it is measured by hours worked, production, or efficiency; (2) it is so substantial that it can be assumed that employees consider it a part of the wages for which they work; or (3) it is paid pursuant to a contract (so that the employee has a legal right to the payment and could bring suit to enforce it). If the holiday or special bonus is a gift or in the nature of a gift, it may be excluded from the regular rate even though it is paid with sufficient regularity so that the employees are led to expect it. Such a bonus is excludable even though the amounts paid to different employees or groups of employees vary with the amount of the salary or regular hourly rate or according to length of service, so long as the amounts are not measured by or directly dependent on hours worked, production, or efficiency. 29 C.F.R. § 778.212 (2001).

2. California Law

California and federal law are the same regarding the treatment of gifts as includable within or excludable from the regular rate of pay. See 2002 D.L.S.E. Manual § 49.1.2.4.

D. Profit-Sharing Plans

1. Federal Law

An employee’s regular rate of pay does not include sums paid in recognition of services performed if the payments are made pursuant to a bona fide profit sharing plan or trust or bona fide thrift or savings plan. Such sums, however, may not be credited toward overtime compensation. 29 C.F.R. § 778.213 (2001).

The requirements of a bona fide profit sharing plan or trust or bona fide thrift or savings plan are exacting. No employer should assume that a payment to an employee from

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profits satisfies the regulations under the F.L.S.A. without carefully reviewing the terms of the Code of Federal Regulations. See id. §§ 547.0-.3, 549.0-.4.

2. California Law

California and federal law are the same regarding the treatment of profit-sharing plans as includable within or excludable from the regular rate of pay. See 2002 D.L.S.E. Manual § 49.1.2.4.

E. Prizes

1. Federal Law

Prizes are includable in the regular rate as a form of bonus if they are paid as remuneration for the quality, quantity, or efficiency of work done by employees during their customary working hours at their normal assigned tasks. 29 C.F.R. § 778.331 (2001). Under certain circumstances, prizes paid pursuant to a bona fide suggestion system are not included in the regular rate. Id. § 778.333.

2. California Law

California law provides no statutory guidance regarding the inclusion or exclusion of prizes in the regular rate. Thus, prizes which would be included in the regular rate under federal law presumably also would be included in the regular rate under California law. In Provine v. Office Depot, Inc., No. C 11-00903 SI, 2012 U.S. Dist. LEXIS 93881 (N.D. Cal. July 6, 2012), the court analyzed Office Depot’s Bravo Award Program, in which managers could award Bravo Cards to employees for exceptional performance. Bravo Cards were placed in a container, and at the end of the month, there was a drawing for a $50 cash prize, which was paid in the winning employee’s next paycheck. Id. at *2. Office Depot did not include Bravo Awards in calculating an employee’s regular rate of pay for purposes of computing overtime, nor did it pay an overtime premium on the Bravo Awards themselves. Id. at *3. Plaintiff won two Bravo Awards; had these awards been included in calculating his overtime, he would have received an additional twenty-three cents in overtime. Id. He brought suit for claims including failure to pay overtime wages, failure to provide accurate wage statements, and failure to pay all wages on termination. Id. at *3-4.

Office Depot argued that it was not required to include Bravo Awards in the regular rate of pay because they were discretionary bonuses. The court rejected this argument. Even though the fact of receiving a Bravo Award was discretionary, the amount was not because it was always $50. Id. at *13. Office Depot also asserted that the Bravo Awards were excludable under section 7(g)(3) of the F.L.S.A., which allows employers to exclude certain amounts from an employee’s regular rate where a basic rate is used. However, the court found that section 7(g)(3) did not apply to employees with a single hourly rate of pay; furthermore, de minimis amounts could be excluded only where the employee agreed to such exclusion. Id. at *15-16. The court consequently denied Office Depot’s motion for

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summary judgment on plaintiff’s claim for overtime and the related Labor Code, UCL, and PAGA claims. Id. at *17.

V. OVERTIME CALCULATIONS

A. General Rule

1. Federal Law

An employer must pay non-exempt employees for overtime at a rate of one and one-half times their regular wage rate for hours worked in excess of forty hours in one workweek. See 29 U.S.C. § 207(a) (1992). Overtime must be computed for each workweek and cannot be averaged over more than one workweek. See 29 C.F.R. §§ 778.103-.104 (2001). Holiday, sick, vacation or any other type of pay for hours not actually worked need not be counted toward the forty-hour workweek. Id. § 778.102.

2. California Law

California law requires an employer to pay non-exempt employees for overtime at a rate of one and one-half times their regular rate of pay for hours worked in excess of forty hours in one workweek. See Cal. Lab. Code § 510. California law also generally requires that an employer pay non-exempt employees for overtime at a rate of one and one-half times their regular rate of pay for hours worked in excess of eight hours in one workday, and twice their regular wage rate for hours worked in excess of twelve hours in one workday. Id. An employer also generally must pay nonexempt employees one and one-half times their regular rate of pay for the first eight hours worked on the seventh consecutive day of work in a workweek, and twice their regular rate of pay for any work in excess of eight hours on the seventh consecutive day of work in a workweek. Id.

B. Rule for Employees Who Have Two or More Different Regular Rates of Pay

1. Federal Law

There are two permissible methods of determining the regular rate for employees who work at two or more different rates of pay during a single workweek. The usual method is to use the weighted average of the two rates to determine the employee’s regular rate. See 29 C.F.R. § 778.115 (2001). For example, if an employee performs forty hours of production work at $10 per hour and eight hours of custodial work at $8.00 per hour, the employee would earn $464.00 in straight time compensation (40 hours x $10/hour) + (8 hours x $8/hour) = $464.00. The employee’s regular rate for overtime would be $9.67 per hour ($464.00/48 hours = $9.67/hour). The employee would be paid $38.68 extra in overtime for a total of $502.68 ($9.67 x ½ x 8 hours + $464.00).

The second method is to compute overtime on the basis of the regular rate for the work being performed during the overtime hours. This method is permissible only by prior

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agreement of the employee where the employee is performing two or more different types of work. See id. § 778.419.

2. California Law

California law is silent on this issue. The D.L.S.E. has, however, adopted the weighted average method. 2002 D.L.S.E. Manual § 49.2.5. The D.L.S.E. allows an exception to the weighted average method in situations where an employee is paid two rates during the course of the day and one of those rates is a statutorily-mandated rate (i.e., a prevailing wage rate). In that case, “the regular rate for calculating the overtime rate for work performed on the public works project must be based on the higher of either the weighted average or the prevailing wage rate in effect at the time that the work is performed.” Id. § 49.2.6.

VI. SPECIAL CALIFORNIA WAGE AND HOUR ISSUES

A. “Alternative Workweek Schedules”

California Labor Code section 511 and the I.W.C. Wage Orders set forth the rules pertaining to alternative workweek schedules. Overtime pay after eight hours of work does not apply to employees who work no more than ten hours per day within a forty-hour workweek pursuant to a regularly scheduled alternative workweek. See Labor Code § 511(a). The alternative workweek may be a single schedule for all workers in a work unit or a menu of schedule options from which each employee in the unit can choose. Id. An employer may not, however, reduce an employee’s base rate of pay as a result of the adoption or termination of an alternative work schedule. Id. § 511(c).

An alternative workweek schedule can be adopted if at least two-thirds of the affected employees in a work unit - such as a department, job classification, or shift - approve the schedule in a secret ballot election. Id. § 511(a). Detailed rules regarding election and notice procedures are contained in the I.W.C. Wage Orders. See I.W.C. Wage Order 4-2001(3)(C). An employer is required to make a reasonable effort to find a work schedule not to exceed eight hours per workday in order to accommodate any affected employee who is eligible to vote in an alternative workweek election and who is unable to work the alternative workweek established as a result of that election. See Labor Code § 511(d). Election results must be reported within thirty days to the California Division of Labor Statistics and Research.

Since May 2009, employers have been allowed to offer a regular schedule of 8-hour days as one of the “menu options” in an alternative workweek election. Under this provision, employees who adopt such a menu of work schedule options may, with the employer’s consent, move from one schedule option to another on a weekly basis.

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B. Commission Sales Agreements

Commission sales agreements normally specify, at a minimum, the formula used to calculate commission amounts, the conditions precedent to the receipt of commissions, and any ancillary matters such as entitlement to commissions after termination. With limited exception, an employer is permitted to establish conditions precedent to payment of commissions. Consider, for example, a simple hypothetical in which there are three events involved in making a sale: booking the sale, delivery of the product and payment by the purchaser. An employer may withhold the commission until the first, second, or third event is satisfied. Despite the employer’s right to decide when to pay commission, questions often arise regarding the interpretation of commission sales agreements, each relating to the termination of the employment relationship.

First, can an employer withhold payment to an employee who has satisfied all conditions precedent to receipt, but who thereafter is terminated and is not active when the check is cut? The answer is no. An employer may not withhold payment simply because a person is no longer an employee at the time the commission check is cut. If all conditions precedent are satisfied, the employer must pay the commission pursuant to contract law. “[I]f the employee is the procuring cause of the sale, he or she is entitled to the commissions. The term, ‘He who shakes the tree is the one entitled to gather the fruit’ is used to describe the concept.” 2002 D.L.S.E. Manual § 34.6.

Second, can an employer withhold payment to an employee who has satisfied all conditions precedent to receipt that are within his or her control (e.g., all but payment by the purchaser), but who terminates prior to such payment? Courts have upheld commission sales agreements if the applicable forfeiture provision is not unconscionable. For example, the court in American Software, Inc. v. Ali, 46 Cal. App. 4th 1386, 54 Cal. Rptr. 2d 477 (1996), considered whether a provision of a former sales employee’s contract that terminated her right to receive commissions on payments received on her account thirty days after severance of her employment was unconscionable. The provision of the contract that addressed commission rights provided that commissions were earned when the employer received payments. Id. at 1389.

In addition to analyzing whether the commission provision was procedurally unconscionable, the court analyzed whether the provision rendered the agreement substantively unconscionable, i.e., whether the contractual terms were so one-sided as to “shock the conscience.” Id. at 1391-92. The court determined that the agreement was not substantively unconscionable based on the circumstances as they existed at the time the employee entered into the agreement. Id. at 1392.

Specifically, the court found that the challenged provision was commonplace in employment contracts with sales representatives who have ongoing responsibilities to “service” the account once the representative makes the sale. Id. at 1393. The court also agreed with the employer’s rationale for deferring commissions until payment was actually received:

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“[I]f the entire commission were to be deemed earned by merely obtaining buyers, the burden of servicing those buyers pending receipt of revenues would fall on [the employer’s] other salespersons unfamiliar with the earlier transaction who would receive nothing for their efforts.”

Id. (citation omitted; first alteration in original). Thus, the court found that the agreed-to provision was not unconscionable. Id.

In assuming that every step in a sale to a customer involves work, the court in American Software gave credence to the employer contention that servicing a customer after the sale is an important component of the overall sales effort. Thus, the court provided employers with a favorable decision by focusing on fairness to employees involved in post-sale services.

The American Software case is consistent with past California decisions that have upheld the terms of explicit contracts. Thus, if the commission sales agreement is clear and unambiguous and the employee does not satisfy the conditions precedent as set forth in the agreement, the employer is not required to pay the commissions. See D.L.S.E. v. Dick Bullis, Inc., 72 Cal. App. 3d Supp. 52, 57-58, 140 Cal. Rptr. 267 (1977) (affirming defendant’s motion for nonsuit; an employee who voluntarily terminated her employment prior to delivery of seven vehicles she sold was not entitled to commission on those sales where agreement explicitly and unambiguously provided that an employee was entitled to commissions only where the employee’s orders were licensed and delivered prior to her termination of employment); Powis v. Moore Mach. Co., 72 Cal. App. 2d 344, 354-55, 164 P.2d 822 (1945) (reversing judgment for the plaintiff; employee was not due commissions where employee understood and entered into agreement which provided that commissions were due upon delivery of sold goods).

Nonetheless, some courts will focus on both the agreement and the employer’s underlying conduct to determine the enforceability of the particular conditions precedent. For example, if the employee in the above hypothetical was involuntarily discharged, the employer might be required to pay the commissions. See 2002 D.L.S.E. Manual § 34.8. In Dana Perfumes, Inc. v. Mullica, 268 F.2d 936, 937 (9th Cir. 1959), the commission sales agreement provided that the employer would not pay commissions for “sales or shipments on orders” subsequent to termination. The employer terminated the employee before delivery of large sales that the employee had made. The court found that the employer, who had prepared the contract, was required to pay the employee the commissions on the sales. Id.

Third, to what extent may an employee maintain a quantum meruit argument? In those instances in which an employer does not clearly designate its post-termination rights and responsibilities with respect to commission payments, the courts provide differing remedies. If the contract is ambiguous with regard to the conditions precedent, then the employee may have a valid quantum meruit argument. In Watson v. Wood Dimension, Inc., 209

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Cal. App. 3d 1359, 257 Cal. Rptr. 816 (1989), the employee entered into a commission sales agreement with his employer, but the agreement failed to address the employee’s commission rights upon his termination. After the employee’s termination from the company, sales were made to a client to whom the employee had played an instrumental part in introducing the company’s product. Looking to federal cases for guidance, the Watson court held that the employee was entitled to the commission under a quantum merit theory. Id. at 1365.

Fourth, can an employer “charge back” a commission that it previously paid to an employee because, for example, the customer later returned the merchandise or cancelled the contract for services? Charge-back policies have engendered much litigation, with plaintiffs’ attorneys arguing that such practices involve unlawful wage deductions or the recapture of wages previously paid, in violation of Labor Code Sections 221 and 224. However, a California court of appeal upheld an employer’s charge-back policy in Steinhebel v. Los Angeles Times Communications, 126 Cal. App. 4th 696, 24 Cal. Rptr. 3d 351 (2005). In Steinhebel, the employer paid commission advances to telemarketers who sold subscriptions to the Los Angeles Times. Under the commission policy, the salesperson did not earn a commission on the sale unless and until the customer kept the subscription in force for 28 days. If the customer cancelled the subscription before that time, the employer charged back the commission advance on that sale, deducting it from a subsequent commission advance. The court of appeal found this practice to be lawful. It found that the advance on a commission did not constitute the payment of “wages,” because at that point the sale had not yet ripened into a commissionable order. According to the court, the employer’s 28-day requirement was a valid condition precedent to the employees’ entitlement to a commission and, therefore, charging back the unearned advances from future advances does not take back wages previously paid or otherwise violate California law.

Another court reached a contrary result in Harris v. Investor’s Business Daily, Inc., 138 Cal. App. 4th 28, 41 Cal. Rptr. 3d 108 (2006). There, the employer employed telemarketers to sell subscriptions to a financial newspaper. The employer compensated the telemarketers on the basis of a point system which rewarded them for selling longer subscriptions, winning daily contests, and meeting weekly sales goals. If a customer cancelled a subscription within 16 weeks, the employer “charged back” a certain number of the “points” that the employee otherwise earned on the sale. Overturning summary judgment, the court found there was a triable issue whether this charge-back system constituted an unlawful recapture of earned wages in violation of Labor Code § 221.

However, another court upheld an employer’s commission charge-back policy in Koehl v. Verio, Inc., 142 Cal. App. 4th 1313, 48 Cal. Rptr. 3d 749 (2006). In Koehl, four former sales associates brought a class action against Verio in California state court, alleging that Verio’s charge-back system, which allowed Verio to seek reimbursement for any commission paid for an account cancelled prior to receiving three months of customer payments, unlawfully deducted from employees’ wages in violation of various Labor Code provisions, including particularly Labor Code § 221. The court of appeal for the First Appellate District affirmed the trial court’s dismissal of the plaintiffs’ claims, concluding that Verio’s

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commission payments effectively were “advances” against as-yet-unearned commissions. The Koehl court noted that prior cases have long recognized, and enforced, commission plans agreed to between an employer and employee, and have applied fundamental contract principles to determine whether a salesperson has, or has not, earned a commission. Moreover, the court concluded, alternatively, that even if Verio’s initial commission payments were “wages,” its system of charge-backs was lawful for an independent reason under Labor Code section 224. This section permits employers to withhold or divert any portion of an employee’s wages when “a deduction is expressly authorized in writing by the employee to cover ... deductions not amounting to a rebate or deduction from the standard wage.” The court found that Verio’s commission deductions were protected by Section 224, because Verio made them pursuant to a written agreement, and it did not deduct them from the employees’ “standard wage.” On the latter point, the court interpreted “standard wage” to refer to employees’ base salaries, not their commission income.

An appellate court has upheld the validity of a commission policy that provided for a longer time frame between the advance payment and the defined earnings event. In DeLeon v. Verizon Wireless, LLC, 207 Cal. App. 4th 800, 805 (2012), Verizon’s commission chargeback policy allowed chargebacks for up to 365 days if a customer cancelled a cell phone service contract. The court affirmed summary judgment in favor of the employer, holding that the policy did not violate Labor Code section 223, which prohibits the secret underpayment of wages. Id. at 803. The compensation plan clearly stated that commission payments were advances, id. at 810, and the chargeback provision was not unconscionable, id. at 814. The court rejected plaintiff’s argument that a chargeback provision violated section 223 unless the employee signed an authorization for the chargeback deductions. Plaintiff’s receipt of the compensation plans, training on the chargeback provision, and commission statements showing the advances and chargebacks established that he understood how he would be compensated, id. at 813-14, and his continued performance was his acceptance of the compensation plan, id. at 813.

In Sciborski v. Pacific Bell Directory, 205 Cal. App. 4th 1152 (2012), the court addressed a different issue—whether a commission plan is sufficiently specific to authorize a clawback. The court affirmed a jury award in favor of a unionized sales representative for violation of section 221 where the company paid $36,000 in commissions to plaintiff and later charged back over $19,000 through pay deductions after discovering a clerical error in assigning the commission-producing account to plaintiff. Plaintiff had satisfied all applicable conditions necessary to earning a sales commission under the CBA, id. at 1160, and nothing in the CBA allowed the employer to divest an employee of a commission due to the company’s clerical error, id. at 1161. On appeal, the employer argued that the claim was preempted by section 301 of the Labor-Management Relations Act. Id. at 1156. The court rejected this argument, holding that the analysis of section 221 and the employee’s claim of constructive discharge in violation of public policy, which turned on whether plaintiff had “earned” the sales commission, did not require the interpretation of a collective bargaining agreement. Id. at 1168, 1174. In order for an employer to recoup an advance on commissions if certain conditions are not satisfied, the condition must be clearly expressed and generally must be in

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writing. Here, no document allowed the employer to deduct wages based on the employer’s clerical error in the account assignment process. Id. at 1171.

To determine whether employees qualify under the commissioned-employee exemption found in I.W.C. Wage Order Nos. 4 and 7, it is important for employers to understand which forms of supplemental pay qualify as “commissions” under California law and which do not. In general, the courts have stated that to be a “commission,” the payment must satisfy two requirements. First, it must be made to employees principally engaged in selling the employer’s product or service, not making the product or rendering the service. Second, the payment must be calculated as a percentage of the price of the product or service. See, e.g., Keyes Motors, Inc. v. DLSE, 197 Cal. App. 3d 557, 563 (1987), cited with approval by the California Supreme Court, Ramirez v. Yosemite Water Co., 20 Cal. 4th 785, 803-04 (1999).

However, some courts have taken a more expansive view of commissions in ruling on other pay arrangements. In Areso v. CarMax, Inc., 195 Cal. App. 4th 996 (2011), the employer paid its vehicle salespersons a flat amount per vehicle sold (approximately $150), regardless of the sale price, not a percentage of the sale price. The California court of appeal found these payments to be commissions within the definition of Labor Code section 204.1, because the payments were based on the amount of the employees’ sales, even though not tied to the value of the sales.

In Marr v. Bank of America, N.A., No. C 09-05978 WHA, 2011 U.S. Dist. LEXIS 24868 (N.D. Cal. Mar. 8, 2011), under defendant’s compensation policy, mortgage loan officers were responsible for any uncollected fees associated with loans sold by that officer. An example was defendant’s “underage” policy, in which officers had the option to undercut the published mortgage rate by lowering the rate or waiving fees. Under this policy, the officer agreed to cover fifty percent of the allowable underage through a commission reduction, which was carried forward against future compensation. Id. at *7. A rate-lock charge occurred when a mortgage process was not completed within a certain time after the customer agreed to a mortgage. Id. at *8-9. The court held that these types of policies did not violate section 221. It noted that in Prachasaisoradej v. Ralphs Grocery Co., Inc., 42 Cal. 4th 217 (2007), the California Supreme Court distinguished between a plan that provided a wage, made deductions, then provided a reduced wage, and a plan that did not provide a wage amount until costs were taken into account—the latter of which was approved in Ralphs. Here too, defendant’s plan held mortgage loan officers responsible for expenses related to the loans they sold before calculating commissions. The court rejected plaintiff’s distinction between the Ralphs plan, which calculated the bonus on a business-wide basis, and the plan here, which was calculated on an individual basis. “California law equally approves of schemes that make individualized wage adjustments attributable directly to the employee’s conduct, as here.” Id. at *13. The court granted the employer summary judgment as to the claim for unlawful wage deductions of expenses not related to plaintiff’s assistants. Id. at *14-15.

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Plaintiff also challenged expenses related to paying his assistants from his commission. The court found there were triable issues of fact as to whether plaintiff consented to paying his assistants’ bonuses and whether these deductions were made for the benefit of the employer, which would violate section 224. The court denied both parties’ motions for summary judgment as to the assistant salary expenses. Id. at *16-17.

In Muldrow v. Surrex Solutions Corp., 208 Cal. App. 4th 1381 (2012), another California court of appeal panel adopted a broader interpretation of “commissions” than had been endorsed by any prior court ruling. There, the plaintiffs were employed as employment recruiters for a placement firm, Surrex. Their job was to recruit “candidates” for Surrex’s clients. Part of their job was to convince both the candidate and the client that the placement of the candidate with the client was a proper fit. Surrex generally placed candidates with clients in one of two ways. Some were hired directly by Surrex’s clients. For such “direct hire” placements, the recruiters received a commission equal to a percentage of the placement fee that Surrex received from the client. Id. at 1393. Others were hired by Surrex as consultants, who then performed work for the client as contractors. Surrex would in turn bill the client at an hourly rate for the consultant’s services. In such cases, the recruiters received a percentage of the “adjusted gross profit” that Surrex earned from the client as payment for the consultants’ services – defined generally as the rate at which clients were billed for a consultant, less the costs to Surrex of employing the consultants (their pay, benefits, expenses, and overhead). Id.

The plaintiffs argued that these payments were not commissions, because the recruiters were not principally engaged in selling and, moreover, their profit-based payments were not based solely on a percentage of the sale price; instead, they were based in part on the costs that Surrex would bear, in addition to the revenue that Surrex received from the sale.

The court of appeal, however, disagreed with the plaintiffs’ argument and found the payments to be commissions. First, it found that the activities of the recruiters in searching for candidates and attempting to persuade both the candidates and the clients to accept the placements is sales-related activity within generally-accepted notions of “selling.” Id. at 1391-92. In addition, the court held that Surrex’s payments were sufficiently related to the price of services sold to constitute commissions for purposes of the commissioned-employee exemption. Id. at 1395-96. The court noted that prior court rulings had never addressed a pay system like Surrex’s. It characterized plaintiffs’ contention that “commission” includes only payments that are based strictly, and solely, on a percentage of the price of the product or service as an “excessively narrow and wooden application of Keyes Motors and Ramirez.” Id. at 1395.

Labor Code section 2751, which was added on January 1, 2012, and becomes effective as of January 1, 2013, will require California employers to memorialize all commission agreements in writing, explaining the methods by which commissions will be computed and paid. Employers will be required to provide all affected sales employees with signed copies of the applicable commission contract and obtain a signed receipt for the

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contract from each employee. Section 2751 adopts the definition of commissions now found in Labor Code § 204.1 – namely, “compensation paid to any person for services rendered in the sale of such employer’s property or services and based proportionately upon the amount or value thereof.” Section 2751 excludes productivity bonuses and other bonuses and profit-sharing plans from these new requirements, unless “there has been an offer by the employer to pay a fixed percentage of sales or profits as compensation for work to be performed.”

C. Vacation Pay

Labor Code section 227.3 requires an employer to pay an employee upon termination all vested vacation time “as wages.” That same section prohibits an employer from maintaining a policy that provides for the forfeiture of vacation time upon termination (i.e., a so-called “use-it-or-lose-it” policy). The precise meaning of these provisions was addressed by the California Supreme Court in Suastez v. Plastic Dress-Up Co., 31 Cal. 3d 774, 183 Cal. Rptr. 846 (1982).

In Suastez, the California Supreme Court addressed a seemingly simple question: When does the right to a vacation vest for purposes of Labor Code section 227.3? The court’s answer has had far-reaching implications:

“[V]acation pay is . . . [a form of] wages.”

Because most employers permit the use of vacation only after the lapse of specified periods of time, vacation pay is . . . a form of “deferred compensation.”

“[T]he right [to vacation pay] is protected from forfeiture by [California Labor Code] section 227.3.”

31 Cal. 3d at 779-84.

The Suastez decision does not expressly state whether vacation time accrues on an hourly, daily, weekly, or some other basis. The Labor Commissioner interprets Suastez as providing for payment at termination based on a daily pro-rata share of the final rate of pay as of the date of termination. See 2002 D.L.S.E. Manual § 15.1.1.

In the wake of Suastez, most California employers adopted vacation pay policies based upon “earn as you go” (i.e., 1.6 days per month) procedures for accruing vacation. Employers who do not modify their vacation pay policies to specifically reference that accrual occurs over the course of the year risk having the entire annual vacation allotment amount deemed earned as of January 1 of the accrual year.

Employees who earn vacation benefits must be allowed at some future time to either take the vacation time off work or be paid vacation pay in lieu of time off work. If they wish, employers may pay employees for unused vacation rather than letting vacation carry

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over from year to year, by, for example, paying the cash value of the unused vacation after the end of each year.

When employees do not take the full amount of vacation that they could have taken in a particular year, for whatever reason, the unused vacation automatically carries over for use in a subsequent year, assuming that the employer has not “cashed it out.” It cannot be forfeited. However, California employers are allowed to have a policy that places a cap on how much vacation an employee may accrue at any one time - a so-called “maximum accrual cap” or “no additional accrual” policy. The concept of a maximum accrual cap is not written in any California statute, but the D.L.S.E. has endorsed the concept, and California courts have approved the use of accrual caps. See, e.g., Boothby v. Atlas Mech., Inc., 6 Cal. App. 4th 1595, 8 Cal. Rptr. 2d 600 (1992); 2002 D.L.S.E. Manual § 15.1.4.

Under the D.L.S.E.’s interpretation of California law, employees must always be given a reasonable amount of time to take vacation time off once it has accrued and is available to be taken. 2002 D.L.S.E. Manual § 15.1.4.1. Until 2005, the D.L.S.E. considered nine months to be a reasonable amount of time. Therefore, the D.L.S.E.’s enforcement position was that an employer’s vacation accrual cap could not be lower than 1.75 times the employee’s annual vacation accrual rate (the equivalent of one year and nine months), thus giving employees at least nine months beyond the end of the year in which the vacation accrued to use the vacation before the cap takes effect. For example, if employees are entitled to 10 vacation days per year, an employer’s policy could state that these employees may not accrue more than 17.5 vacation days at any one time. Thus, an employee who does not take any vacation time off in the first year or in the first nine months of the second year would then reach the accrual cap and would not accrue any additional vacation until he or she takes some vacation time off. This is not considered to be an improper “use-or-lose” policy, because employees cannot lose what they never earned in the first place. To be enforceable, however, a vacation accrual cap must be clearly spelled out in advance in the employer’s vacation policy; it is not automatically operative by law.

The D.L.S.E. also applied its nine-month rule as a restriction on an employer’s right to dictate when employees must take their vacations. The agency’s historic enforcement position on “forced vacations” was that if the employer wishes to establish a policy mandating the use of already-accrued vacation, it must give the employees a minimum of nine months’ notice prior to the week(s) in which the time must be taken, so as to give employees the opportunity to use the accrued time when they see fit, subject to any reasonable restrictions. See former D.L.S.E. Opinion Letter dated August 30, 2002.

However, the Labor Commissioner formally withdrew the August 30, 2002 Opinion Letter and announced a change in the D.L.S.E.’s enforcement policy as it relates to the nine-month rule. In a Guidance Memo dated May 31, 2005, to the D.L.S.E. staff, the Labor Commissioner stated:

I can find no legal authority or sound business argument for the determination that a minimum of nine (9) months’ notice

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must be provided prior to employer-mandated usage of vacation or personal/paid time off (PTO). The statutory mandate in Labor Code section 227.3 that the Labor Commissioner “shall apply the principles of equity and fairness” in the resolution of any dispute with regard to vested vacation time, need only require reasonable notice which should be as far in advance as possible but generally no less than one full fiscal quarter or 90 days, whichever is greater.

(Emphasis in original.)

This Guidance Memo does not address maximum accrual caps. Based on the reasoning in the Guidance Memo, it appears likely that the D.L.S.E. now would allow an accrual cap that is based on 1.25 rather than 1.75 times the employee’s annual vacation entitlement.

In California, sick leave, unlike vacation, does not constitute earned “wages.” Therefore, employers are permitted to have a no-carryover, “use-or-lose” sick leave policy, and unused sick leave need not be paid out at termination unless company policy provides otherwise. However, paid personal time off policies, allowing employees to take a designated amount of paid time off for any reason (not limited to sickness), are treated the same as vacation policies under California law. 2002 D.L.S.E. Manual § 15.1.12. Therefore, the principles discussed above, including an employer’s obligation to pay accrued vacation at termination and its right to establish a maximum accrual cap, apply to such PTO policies.

In 2006, a California court of appeal issued a significant ruling on when a vacation pay claim under Labor Code section 227.3 accrues, and what the applicable statute of limitation is for such a claim. In Church v. Jamison, 143 Cal. App. 4th 1568, 50 Cal. Rptr. 3d 166 (2006), arising from a legal malpractice action, the court ruled that a claim for unpaid vacation under Section 227.3 does not accrue until the employee’s employment has terminated without the employee having taken off his or her vested vacation time. Consequently, any purported cause of action seeking payment for unused vacation on behalf of an incumbent employee would be premature and would have to be dismissed on that basis. The court further held that plaintiffs who sue for unpaid vacation are not limited to recovering any sums that were accrued but unused during their final four years of employment. Instead, according to the court, employees can recover any vacation pay that they lost throughout their entire employment. Thus, for example, a long-term employee who was employed for 20 years can recover his or her entire 20 years’ worth of unpaid vacation. Otherwise, the court said, employers would improperly have the advantage of a “dual” statute of limitations in a vacation pay case: a limit on how soon a suit must be brought in relation to the employee’s termination and a second limit on how far back an employee may look, prior to the termination, in recovering unpaid wages.

This holding is directly contrary to the D.L.S.E.’s historic enforcement position and the holding in another court of appeal case, Sequeira v. Rincon-Vitova Insectaries, Inc., 32 Cal.

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App. 4th 632, 38 Cal. Rptr. 2d 264 (1995). The Sequeira court limited a plaintiff’s recovery to a “look-back” period of four years prior to the employee’s termination. The Church court concluded that the D.L.S.E. is not entitled to deference on this issue, and that Sequeira was wrongly decided. The court rejected the defendant’s argument that it would be unduly burdensome for employers to reconstruct lost vacation pay over a period of many years. Because of the split between Sequeira and Church, the California Supreme Court may take up this issue.

Finally, the court in Church considered, but did not squarely decide, the applicable statute of limitations for a vacation pay claim under Section 227.3 – that is, how soon after an employee’s termination the employee must bring suit. The court listed the possibilities as two years (if the vacation policy is based on an oral contract), three years (as a liability created by statute) or four years (if the vacation policy is based on a written document). The court found it unnecessary to resolve the statute of limitations in this case, but it suggested in dicta that where the employer’s vacation policy is in writing, as usually is the case, a four-year statute will apply, pursuant to Code of Civil Procedure section 337.

A California court of appeal has addressed the question of whether an employer’s sabbatical policy was a form of vacation within the meaning of the Suastez line of cases and Labor Code § 227.3 In Paton v. Advanced Micro Devices, Inc., 197 Cal. App 4th 1505, 129 Cal. Rptr. 784 (Aug. 5, 2011), the plaintiff brought a putative class action against his former employer, alleging that the employer had failed to pay him and other employees for an eight-week sabbatical that he had earned but not used by the time he resigned. Under defendant’s sabbatical policy, salaried employees with seven years of service were eligible for an eight-week fully-paid sabbatical. The leave was forfeited, however, if employees did not use it before their employment terminated. Plaintiff alleged that his right to the sabbatical had vested over the seven years he worked for defendant and, therefore, he was entitled to be paid for it when he resigned. He further alleged that even those employees who had worked for fewer than seven years were entitled to be paid for the unused sabbatical in proportion to the time they had worked.

The Sixth Appellate District adopted a new four-part test for determining when a sabbatical program is not “regular vacation.” First, the sabbatical leave must be granted infrequently (such as seven years); second, the length of the leave must be longer than that normally offered as vacation, in order to achieve the employer’s purpose in maintaining the program, such as to reenergize employees; third, the sabbatical leave must be granted in addition to regular vacation; and fourth, the sabbatical program should incorporate some feature demonstrating that employees taking the sabbatical are expected to return to work for the employer after the leave is over. Applying this test to defendant’s sabbatical program, the court overturned an award of summary judgment for the defendant and remanded the case for further proceedings at the trial court level. According to the court, the ultimate fact to be determined is defendant’s true purpose in establishing its sabbatical policy. “While there are facts to support a finding that the sabbatical was intended as incentive to induce experienced employees to continue working for defendant and increase their productivity or creativity upon return to work, reasonable minds could find, instead,

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that the leave was actually intended as additional vacation for longer term employees.” Id. at 1524.

D. Personal and Floating Holidays

Section 15.1.12 of the D.L.S.E. Manual states:

D.L.S.E. has been asked on numerous occasions to give an opinion regarding the difference between vacation wages and other leave benefits. The D.L.S.E. has always opined that leave time which is provided without condition is presumed to be vacation no matter what name is given to the leave by the employer. Such an enforcement policy insures that leave policies which are nothing more than vacation policies under a different name are not instituted as subterfuges to defeat the provisions of Labor Code § 227.3 and the conclusions of the California Supreme Court in Suastez. Thus, there must be an objective standard by which it can be established that the leave time is attributable to holidays, sick leave, bereavement leave or other specified leave. Tying the right to take the time to a specific event or chain of events such as allowing a vacation period for the Thanksgiving weekend would suffice to satisfy the test.

2002 D.L.S.E. Manual § 15.1.12.

In Karrer v. Best Buy Co., No. LA CV 11-07697 JAK (MRWx), 2012 U.S. Dist. LEXIS 77242 (C.D. Cal. May 24, 2012), the court granted summary judgment to Best Buy where it issued a “Holiday Pay Policy” memorandum allowing exempt managers who worked on New Year’s Day, Memorial Day, Independence Day, or Labor Day to schedule an additional day off within 30 days of the holiday. Plaintiffs argued that the Holiday Pay Policy memorandum guaranteed paid holidays, which constituted non-forfeitable wages under Labor Code section 227.3. Id. at *12. The court held that the holidays created by the memorandum were not vacation under Paton v. Advanced Micro Devices. Instead, they were conditioned upon the occurrence of specific Company designated holidays, and upon the manager’s working that day. Id. at *23. Furthermore, they were granted for the particular purpose of allowing an employee to move a holiday to another date within a 61-day window in order to accommodate the needs of the store. Id. at *24. Because the shifting holidays were not vacation days under section 227.3, there was no rule they could not be forfeited. Whether unused holidays would be considered wages was governed by the Holiday Pay Policy memorandum, which provided that the holiday would be lost if not used, and would not be paid out on termination. Id. at *26.

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E. Record-keeping Requirements

Under the California Wage Orders, employers must maintain time records reflecting (1) the beginning and ending of employee work periods; (2) meal periods; (3) split shift intervals, if any; and (4) total hours worked. See I.W.C. Wage Order No. 4-2001(7)(A). Additionally, employers must maintain payroll records reflecting (1) the wages paid each payroll period; (2) total hours worked in the payroll period; and (3) applicable rates of pay. Id. Such records must be kept for three years. Id. § (7)(C). Note Labor Code section 206(b) which added a new burden and new penalties for inaccurate time recording.

The California Labor Code provides that employees may inspect their personnel records upon reasonable request. See Cal. Lab. Code § 1198.5. Further, upon request, employees are entitled to copies of all records they have signed.

F. Itemized Pay Stubs

Employers must provide employees with itemized wage statements on paydays, containing the following information:

(1) gross wages earned, (2) total hours worked by the employee (non-exempt employees only), (3) the number of piece-rate units earned and any applicable piece rate (if applicable), (4) all deductions, provided that all deductions made on written orders of the employee may be aggregated and shown as one item, (5) net wages earned, (6) the inclusive dates of the pay period, (7) the name of the employee and the last four digits of his or her social security number or an employee identification number other than a social security number may be shown, (8) the name and address of the legal entity that is the employer, and (9) all applicable hourly rates in effect during the pay period and the corresponding number of hours worked at each hourly rate (for non-exempt employees only).

Cal. Lab. Code § 226(a). Any employer that commits a “knowing and intentional” violation of this section and thereby causes an employee to “suffer injury” is liable for penalties in the amount of $50 per employee for the first pay period and $100 per employee for subsequent pay periods, up to an aggregate of $4,000. Id. § 226(e). In addition, an employer may be liable for civil penalties of $250 per employee for an initial violation and $1,000 per employee for a subsequent violation. Id. § 226.3.

Employees or former employees may make a written or oral request to inspect or copy the employer’s records containing the information required by Section 226(a). Upon such a request, the employer must make the information available to the employee within 21 calendar days. Id. § 226(c).

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Employers who pay non-exempt employees on a salaried basis are not in compliance with Section 226 if they merely list the employee’s average straight-time hours on each pay stub (for example, 2,080 hours divided by the number of pay periods). D.L.S.E. Op. Ltr. (May 17, 2002). Instead, employers must list the actual number of hours that the employee actually worked in each pay period.

In Wang v. Chinese Daily News, 435 F. Supp. 2d 1042, 1050 (C.D. Cal. 2006), the court granted summary judgment for the plaintiff where the employer’s pay stubs always showed 86.66 for hours worked regardless of the employee’s actual hours worked. The court reasoned, “an employee suffers injury because (1) the employee might not be paid overtime to which she was entitled and (2) the absence of an hourly rate prevents an employee from challenging the overtime rate by [the company]”. Id. The court further stated, “Additionally, this lawsuit, and the difficulty and expense Plaintiffs have encountered in attempting to reconstruct time and pay records, is further evidence of the injury suffered as a result of [the company’s] wage statements.” Id. at 1050-51. The District Court’s decision was later affirmed by the Ninth Circuit. 623 F. 3d 743 (9th Cir. 2010). However, the U.S. Supreme Court granted certiorari and vacated the judgment in Wang on other grounds. 2011 WL 4529967 (Oct. 3, 2011).

In Cicairos v. Summit Logistics, Inc., 133 Cal. App. 4th 949, 35 Cal. Rptr. 3d 243 (2005), five truck drivers brought a suit against their employer alleging, among other things, that the employer had failed to provide proper itemized earnings statements containing all of the information required by Labor Code section 226. The correct legal name of the employer was Summit Logistics, Inc. Its pay stubs reflected the name “Summit” and failed to list the company’s address. In addition, the pay statements separately reflected the number of straight-time hours and overtime hours worked but failed to show the total hours worked. The court concluded that the pay stubs failed to comply with Section 226, because they did not reflect the total number of hours that the drivers worked in each pay period, and they also failed to list the employer’s correct name and address.

Although Section 226 requires employers to accurately list the total hours that employees worked in the contemporaneous pay stub, there is some relief from that requirement in the case of overtime hours. An employer is in compliance with Section 226(a) relating to total hours worked if it itemizes overtime hours as “corrections” on the pay stub for the next regular pay period after the pay period in which the employee performed the overtime work, and if the corrected pay stub states the inclusive dates of the pay period for which the employer is correcting its initial report of hours worked. Employers are not relieved of the obligation to accurately list all straight-time hours that each non-exempt employee worked in the contemporaneous pay period and to include the “total hours worked” in the pay period, albeit with merely an initial report of the overtime hours worked.

A California Court of Appeal decision distinguished the paystub violations that had presented confusing and inaccurate information at issue in the Wang and Cicairos decisions. In Morgan v. United Retail Inc., 186 Cal. App. 4th 1136 (2010), the court affirmed summary

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adjudication for the employer on the plaintiffs’ Section 226 claim, where the only defect on its pay stubs was the alleged failure to show the sum of the listed regular plus overtime hours worked by the employee. The court noted that “Section 226 itself does not define the terms ‘showing’ or ‘total hours worked’ anywhere in the statute” and that such terms must be given “their plain and commonsense meaning.” Id. at 1146 (citations omitted). Webster’s Dictionary defines “show” as “to cause or permit to be seen” or “to make evident or apparent.” Id. It was undisputed the pay stubs showed the total regular and total overtime hours. Id. at 1146-47. The total hours worked thus were evident and apparent. Id.

In Hernandez v. BCI Coca-Cola Bottling Co., No. CV 11-9484 SVW (SSx), 2012 U.S. Dist. LEXIS 55301 (C.D. Cal. Apr. 12, 2012), the court followed Morgan to grant summary judgment for the employer on plaintiff’s section 226 claim. Defendant’s wage statements listed the total hours worked. However, instead of showing a single overtime rate, the wage statements showed two rates: an “OT Base 100%” and “OT Prem 50%.” The court held that under Morgan, the fact that an employee had to add these numbers together to calculate the effective overtime rate did not violate section 226(a). Id. at *9. The court distinguished McKenzie v. Federal Express Corp., 765 F. Supp. 2d 1222 (C.D. Cal. 2011), in which the court found FedEx violated section 226(a)(2) by providing two overtime rate categories, because FedEx did not state the total number of hours worked. In contrast here, defendant’s wage statements identified the total hours worked, thereby minimizing any potential confusion caused by showing the number of overtime hours twice. Id. at *13. To illustrate the three cases, the court provided the following table:

This Case: Morgan: McKenzie:

Sample Wage Statement (Hours

Worked)

Comparable Wage Statement (Hours

Worked)

Comparable Wage Statement (Hours

Worked)

Hourly Pay 40.00 Regular 40.00 40.00

OT Base 100% 0.50 Overtime 0.50 0.50

OT Prem 50% 0.50 40.50 0.50

TOT WKD HRS\WAGES

40.50

[Lawful] [Unlawful]

Id. at *16. The court held that defendant’s wage statements satisfied section 226(a)(9)’s statutory purpose of making it easier for employees to determine whether they were paid for all hours worked at the appropriate hourly rates and therefore were in “substantial compliance” with section 226(a)(9). Id. at *20.

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Effective January 1, 2013, section 226(e) will provide that an employee suffers an “injury” for purposes of section 226 when either “the employer fails to provide a wage statement” or the “employer fails to provide accurate or complete information as required by any one or more of [the nine items required by 226(a)] and the employee cannot promptly and easily determine from the wage statement alone” one or more of those nine items. “Promptly and easily” is newly defined to mean that “a reasonable person would be able to readily ascertain the information without reference to other documents or information.”

Also effective January 1, 2013, section 226(a), which requires an employer to keep a “copy” of itemized employee wage statements containing specified information for a minimum of three years, will provide that “copy” means a duplicate of the itemized wage statement or a computer generated record that accurately shows all required information.

G. Payment of Wages at Termination

Under California law, as a general rule, if an employer discharges an employee, it must immediately pay the employee all earned and unpaid wages at the time of the termination. Cal. Lab. § 201. If an employee quits, the employer must pay the employee’s earned and unpaid wages within 72 hours thereafter, unless the employee has given 72 hours’ previous notice of his or her intention to quit, in which case the employer must pay the employee’s wages at the time of quitting. Id. § 202. As discussed above, the duty to pay all earned wages upon termination extends also to vested vacation wages. Id. § 227.3.

If an employer willfully fails to pay any wages of an employee who is discharged or who quits, in accordance with Section 201 or 202, the employee’s wages continue as a penalty from the due date until the wages are paid or until the employee commences an action to recover the unpaid wages, up to a maximum of 30 days. Cal. Lab. Code § 203.

If an employer willfully fails to pay any wages of an employee who is discharged or who quits, in accordance with Section 201 or 202, the employee’s wages continue as a penalty from the due date until the wages are paid or until the employee commences an action to recover the unpaid wages, up to a maximum of 30 days. Cal. Lab. Code § 203.

Where wages are not calculable until after termination, such as in the case of some commissions, the D.L.S.E. has taken the position that wages are not due at termination, but must be paid as soon as the amount is ascertainable. D.L.S.E. Manual § 4.6. In Labriola v. Bank of America, N.A., No. C 12-79 CW, 2012 U.S. Dist. LEXIS 65853 (N.D. Cal. May 10, 2012), the court followed the D.L.S.E.’s guidance to deny the employer’s motion to dismiss or strike plaintiff’s claim for waiting time penalties and for injunctive relief under the UCL. Plaintiff alleged defendant had a policy of failing to pay financial advisors their final commissions until the regular commission pay date, even if the date was weeks after the employee’s last date of employment. Plaintiff brought suit on behalf of a putative class of financial advisors who received their commission payments after the commissions were calculable and due under sections 201 and 202. Id. at *2. Defendant contended that

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California law did not prescribe when employers had to pay wages that became calculable after termination. Id. at *7.

The court looked at a 1999 D.L.S.E. opinion letter, which provided that employers must pay commissions not yet earned at the time of termination to a terminated employee “immediately upon completion of the conditions precedent.” Id. at *10. The legislative purpose of sections 201 through 203 to ensure prompt payment of earned wages also supported a finding that employers had to pay commission payments that subsequently become calculable to terminated employees immediately. Id. at *13. The court therefore denied the employer’s motion to dismiss plaintiff’s claim for waiting time penalties. The court also found plaintiff had standing to bring a UCL claim: being deprived of the use of his money for at least a month constituted an injury in fact, id. at *17, and the possibility that he could return to work for defendant allowed him to seek injunctive relief, id. at *19.

In Drumm v. Morningstar, Inc., 695 F. Supp. 2d 1014 (N.D. Cal. 2010), the court clarified what amounts are to be included in calculating an employee’s annual wages for purposes of waiting time penalties. The employer had failed to pay plaintiff for his unused vacation upon termination, thus triggering a maximum 30 days of waiting time penalty. The jury calculated the amounts due for both plaintiff’s vested vacation time and his waiting time penalty based on his base salary alone. Id. at 1020. While it was proper to base the vested vacation time on plaintiff’s final rate or base salary, it was improper to calculate the waiting time penalties this way. Plaintiff moved to amend the judgment, arguing that the waiting time penalty should have been based on his salary, commission, bonus, stock options, and expense reimbursement for the year. Id. The court noted that under section 200, “wages” includes “all amounts for labor performed,” whether calculated “by the standard of time, task, piece, commission basis, or other method of calculation.” Therefore, waiting time penalties are properly calculated based on an employee’s base salary, commissions, and bonus. Id. at 1021.

In the application of California’s terminal pay statutes, disputes often arise over the payment or non-payment of bonuses and other incentive pay to departing employees. California law has long been uncertain as to whether an employer may lawfully require that, to be eligible for a particular bonus, employees must remain employed throughout the entire bonus calculation period and/or until the date that the employer thereafter pays out the bonuses to eligible participants. In 2006, a California court of appeal addressed this issue, upholding such a bonus eligibility provision. In Neisendorf v. Levi Strauss & Co., 143 Cal. App. 4th 509, 49 Cal. Rptr. 3d 216 (2006), the plaintiff participated in an annual incentive plan (“AIP”), which stated, in pertinent part: “Unless termination is due to retirement, layoff, long-term disability or death, a participant must be an active employee of the company on the payment date in order to receive an AIP payment. AIP payments are generally made in February following the close of the fiscal year.” A separate incentive plan, the Leadership Shares Plan, stated that “[i]f a Participant’s employment is terminated for unsatisfactory performance or for gross misconduct … prior to any Award Payment Date, the Participant will not be entitled to receive any Leadership Shares, vested or otherwise, and no additional payouts will be made.”

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The employer terminated plaintiffs’ employment on November 26, 2002, for unsatisfactory performance, and did not pay her a bonus under either plan. She then sued the employer, alleging that the bonuses were earned “wages” under California law, and that California public policy prohibits employers from forfeiting such compensation when the employee works for the entire period, or nearly the entire period, upon which the bonus was based. Essentially, the plaintiff contended that forfeiture of the bonus payments was akin to illegal withholding or depriving her of wages that she had earned.

The court of appeal disagreed. It found nothing in the public policy of California that transforms an employee’s contingent expectation of receiving bonuses into an entitlement. The court acknowledged that once an employer has promised a bonus as compensation for service, and the employee has fulfilled all the agreed-to conditions, the promised bonus is considered wages that must be paid. In this case, however, there was no promise made to the plaintiff that she would earn the AIP and Leadership Shares bonuses simply by working for the company during the fiscal year. The company expressly tied the payment of a bonus to a measurable benchmark. Her eligibility for bonus payments was properly determined by the bonus plans’ specific terms and by general contract principles. Moreover, the fact that the plaintiff did not voluntarily quit, but rather was involuntarily terminated, did not change the analysis, as plaintiff alleged. Because the plaintiff did not meet the bonus plans’ eligibility requirements, the employer did not owe her the bonus.

In Schachter v. Citigroup, Inc., 47 Cal. 4th 610 (2009), the California Supreme Court addressed whether an employer’s incentive compensation plan’s forfeiture provisions violated Labor Code §§ 201 and 202. The plan gave participants the option of using a portion of their annual earnings to purchase shares in the parent company’s stock at a price below the stock’s publicly traded market price. Id. at 613. If an employee resigned or was terminated for cause within a two-year vesting period, the employee forfeited the stock and the money used to purchase it. Id. If, however, the employee was involuntarily terminated without cause within the two-year vesting period, the employee received a cash payment equal to the annual compensation that the employee had elected to receive as restricted stock. Id. at 615.

Plaintiffs argued that the plan violated Labor Code sections 201 and 202 because the restricted stock constituted wages that the employee had earned prior to his termination. Id. at 619. Although the court held that the restricted stock payments were a “wage” within the meaning of Labor Code sections 201 and 202, it held that the employee had not “earned” the restricted stock units at the time of his termination. Id. at 619, 621. Looking to the bilateral nature of employment contracts, the court found that “Schachter essentially renegotiated the terms of his compensation with the company” by entering into the restricted stock unit plan. Id. at 620. Under that agreement, the wages could only be considered earned once Schachter had fulfilled the conditions precedent. Id. at 621 (“Only when an employee satisfied the condition(s) precedent to receiving incentive compensation, which often includes remaining employed for a particular period of time, can that employee be said to have earned the incentive compensation (thereby necessitating payment upon

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resignation or termination.”). Because Schachter had not worked for the requisite amount of time, he had not earned the wages at the time of his voluntary termination.

The court would have reached a different outcome, however, if the company had terminated Schachter without cause and if the plan had provided that Schacter would forfeit the non-vested stock. Such a provision, according to the court, would violate the general principle of contract law that prohibits “efforts by one party of a contract to prevent completion by the other party.” Id. at 622.

Finally, the court rejected plaintiff’s analogy to vacation pay. Plaintiff argued that because vacation pay accrues on a pro-rated basis, the restricted stock units should as well. However, the Court distinguished vacation pay, which “is compensation for past services,” from incentive compensation, which is inducement for future services. Id. at 623. Thus, the court concluded that vacation pay is earned through past service, while incentive compensation is earned through future service.

In 2010, the California Supreme Court addressed the appropriate statute of limitations on an employee’s claim for waiting time penalties under Labor Code § 203 arising from an employer’s late payment of final wages. In Pineda v. Bank of America, N.A., 50 Cal. 4th 1389, 117 Cal. Rptr. 3d 377 (2010), Plaintiff Pineda alleged that his former employer paid all of his final wages, but it did so several days after his termination date and thus the payment was untimely. More than a year after his termination, Pineda brought a putative class action for waiting time penalties under Section 203, seeking one day’s pay for each day the employer was late in paying final wages to Pineda and other departing employees. His lawsuit included a claim under California’s unfair competition law (“UCL”), California Business & Professions Code § 17200. Pineda made no claim for unpaid wages, because he admitted that his employer had already paid him all wages due to him.

The issue before the Supreme Court was whether the statute of limitations on Pineda’s suit for waiting time penalties was one year (the usual limitations period on penalty claims under Code of Civil Procedure § 340), three years (based on language in Section 203 allowing a suit for penalties to be brought “at any time before the expiration of the statute of limitations on an action for the wages from which the penalties arise),” or four years (on Pineda’s theory that waiting time penalties are a form of “restitution” within the meaning of the UCL, thus allowing him to use the UCL’s four-year statute of limitations). The Supreme Court concluded that former employees may bring a suit for waiting time penalties up to three years after their cause of action accrues. According to the Court, the Legislature intended to create a special exception in Section 203 to the general rule that suits for penalties must be brought within one year, and this exception applies whether or not the penalty suit is accompanied by a claim for the unpaid wages. The Court also found, however, that waiting time penalties are not recoverable under the UCL, because waiting time penalties are not a form of “restitution” within the UCL. Thus, the Court rejected Pineda’s argument that the UCL’s four-year statute applies to a claim for waiting time penalties.

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H. Business Expense Reimbursement

California Labor Code section 2802 requires that an “employer shall indemnify his or her employee for all necessary expenditures or losses incurred by the employee in direct consequence of the discharge of his or her duties, or of his or her obedience to the directions of the employer, even though unlawful, unless the employee, at the time of obeying the directions, believed them to be unlawful.” Cal. Lab. Code § 2802(a). The term “necessary expenditures or losses” includes “all reasonable costs, including, but not limited to, attorneys’ fees incurred by the employee enforcing the rights granted by [section 2802].” Cal. Lab. Code § 2802 (c).

An employee’s right to reimbursement of such expenses is non-waivable, and any contract or agreement, express or implied, that purports to require an employee to waive the benefits of Section 2802 is null and void. Cal. Lab. Code § 2804; Edwards v. Arthur Andersen LLP, 44 Cal. 4th 937, 953 (2008) (“[A] contract provision releasing ‘any and all claims’ generally does not encompass nonwaivable statutory protections, and in particular does not implicitly apply to an employee’s right to indemnification from the employer.”). The remedies available for a violation of section 2802 include interest, costs and attorneys’ fees. Cal. Lab. Code § 2802(b), (c).

I. Days of Rest

Labor Code sections 551 and 552 currently require that an employee be permitted to take one day of rest within a seven-day workweek, and prohibit an employer from requiring employees to work more than six days in seven nights. Section 554 provides that the day of rest requirements “shall not apply to any cases of emergency nor to work performed in the protection of life or property from loss or destruction, nor to any common carrier engaged in or connected with the movement of trains.” Cal. Lab. Code § 554. Section 554 further permits the “accumulation of days of rest when the nature of the employment reasonably requires that the employee work seven or more consecutive days” so long as in each calendar month the employee is entitled to take the equivalent of one day’s rest in seven. Id. Finally, section 554 authorizes the DLSE to exempt any employer or employees from the provisions of sections 551 and 552 when hardship will result, although the statute does not define “hardship.” Id.

In Mendoza v. Nordstrom, Inc., No. SACV 10-00109-CJC(MLGx) (C.D. Cal. Sept. 21, 2012), the court drew parallels between the meal break statutes at issue in Brinker to section 551’s requirement that employees be “entitled” a day’s rest. Id. at 12. The court found that employers are only required to make a day of rest available; as long as the employer does not force an employee to work more than six consecutive days, an employee is free to waive his or her day of rest. Id. at 10. Furthermore, section 556 exempts an employer from providing a seventh day of rest where “the total hours of employment do not exceed 30 hours in any week or six hours in any one day thereof.” The court found that section 556 applies where an employee’s hours are below six hours “in any one day,” and not only where an employee works for less than six hours on every day of the week as plaintiffs contended. Id. at 23.

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Although the court rejected the Nordstrom’s arguments that under sections 551 and 552, days are measured by its own defined seven-day workweek, and not a rolling period of any seven consecutive days, id. at 8, it held that plaintiffs were not required to work more than six consecutive days, and that they had worked less than six hours on one or more of their consecutive days of work, id. at 1, and therefore found in favor of Nordstrom.

J. Compensation Issues Arising Upon Employee Reclassification

The decision in Head v. Costco Wholesale Corp., 2011 WL 452970 (Cal. Ct. App. Feb. 10, 2011), although unpublished, addressed an issue that employers who reclassify employees must face: how to adjust compensation after reclassification. The Head court analyzed whether Costco had miscalculated the regular rate of pay in computing overtime for its salaried, nonexempt managers after reclassifying them from salaried exempt to salaried nonexempt. Costco used a conversion formula to ensure that the managers’ income would remain the same after reclassification, reducing their base salary and assuming 5 hours of overtime per week. Id. at *1. The court found the conversion formula lawful, holding, “After reclassification, Costco was free to set the base salary at any amount subject to minimum wage laws.” Id. at *4. Moreover, “An employer of an at-will employee can unilaterally modify the compensation agreement, and an employee who receives notice of the modification impliedly accepts it by continuing employment after the modification.” Id.

K. “Private Attorneys General” Enforcement of Labor Code Penalties

On January 1, 2004, a California law took effect that significantly increased the volume of wage-hour litigation brought against California employers. The Labor Code Private Attorneys General Act of 2004 (“PAGA”) allows aggrieved employees to sue employers for civil penalties for the violation of any Labor Code provision other than the workers’ compensation provisions. In addition to their other remedies, aggrieved employees are entitled to retain 25 percent of any civil penalties so awarded and to recover their attorneys’ fees and costs. The remaining 75 percent of any penalty award goes to the State of California’s general fund (50 percent) and the State’s Labor and Workforce Development Agency (25 percent). Under prior law, civil penalties could be collected only by a state agency and, as a practical matter, were seldom imposed. Under PAGA, the civil penalty for any Labor Code violation that does not already have an assigned penalty amount will be $100 per pay period for a first violation and $200 per pay period for any subsequent violations. Cal. Lab. Code § 2699(f)(2).

Employees claiming to be aggrieved may sue under PAGA not only on their own behalf, but on behalf of all similarly-situated current and former employees. Importantly, the California Supreme Court has held that a plaintiff need not bring a PAGA representative action as a class action. Arias v. Superior Court, 46 Cal. 4th 969, 980-87 (2009). As the Supreme Court noted, rulings regarding civil penalties in representative actions will bind all persons covered by the representative action as well as state labor law enforcement agencies. Id. at 986. The Arias court also stated that, by invoking collateral estoppel, non-party employees covered by a PAGA action could, in a separate action, use the civil penalties

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judgment against the employer to obtain non-penalty remedies for the same Labor Code violations alleged in the PAGA action. Id. at 986-87. Therefore, a representative action under PAGA can have a significant impact beyond the civil penalties themselves.

Under PAGA, aggrieved plaintiffs are required to notify the employer and the Labor and Workforce Development Agency (LWDA) of their complaint in writing, by certified mail, before they can pursue a claim for Section 2699 penalties in court. Cal. Lab. Code § 2699.3. For certain types of Labor Code violations, the employer may “cure” the violation within 33 calendar days and thereby avoid the imposition of penalties. In any case, the LWDA may investigate the alleged violation and issue an appropriate citation or determine that no citation will be issued. If the agency takes no action within 33 days, or notifies the complainant within that time that it does not intend to investigate, the complainant may then pursue the claim for Section 2699 penalties in court.

Penalties may not be awarded for most technical violations of the Labor Code, such as posting violations or failure to comply with filing or notice requirements, except for mandatory payroll and workplace injury reporting. Any penalties sought as part of a proposed settlement agreement must be reviewed and approved by the superior court. Additionally, in cases that are litigated under PAGA, courts have the discretion to award a lesser amount than the maximum civil penalty if, based on the facts and circumstances of the case, to do otherwise would result in an award that is unjust, arbitrary and oppressive, or confiscatory.

In Caliber Bodyworks, Inc. v. Superior Court, 134 Cal. App. 4th 365, 36 Cal. Rptr. 3d 31 (2005), the court of appeal drew a distinction between a “statutory” and a “civil” penalty, permitting pursuit of the former without administrative exhaustion, even if listed in Labor Code § 2699.5. Among the key holdings in the opinion were: (1) administrative exhaustion requirements are jurisdictional prerequisites to suit; (2) the administrative exhaustion requirements apply to all claims for civil penalties in the Labor Code, even those for which a private right of action may have existed before the passage of the Private Attorneys General Act; (3) administrative exhaustion requirements do not apply to statutory penalties, actions for unpaid wages, and actions for unfair and unlawful business practices; (4) Labor Code penalty provisions may overlap, doubling the exposure of employers for violations of such overlapping sections; (5) where a plaintiff presents a cause of action seeking civil penalties plus another form of relief, the appropriate procedural step is to move to strike the claim for civil penalties, because a demurrer is not available to eliminate only a portion of the remedies requested in a single cause of action; (6) even though the Private Attorneys General Act does not list Labor Code §§ 210 and 558 as covered by its terms, they both concern civil penalties and, therefore, are subject to the same exhaustion requirements as listed Labor Code sections; and (7) Labor Code § 226.7 provides for a statutory penalty for meal period violations - therefore, a plaintiff may seek § 226.7 penalties without any obligation to exhaust administrative remedies, even though § 226.7 is listed in the Private Attorneys General Act as requiring such exhaustion.

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In Dunlap v. Superior Court, 142 Cal. App. 4th 330, 47 Cal. Rptr. 3d 614 (2006), a California court of appeal ruled that a plaintiff was not required to exhaust the PAGA’s administrative prerequisites to suit before bringing an action to recover waiting time penalties under Labor Code § 203, pay stub penalties under Labor Code § 226, and meal and rest period premiums under Labor Code § 226.7. There, the plaintiff did not assert any claim for civil penalties of a type previously recoverable only by the Labor and Workforce Development Agency. Adopting the Caliber Bodyworks distinction between “statutory” and “civil” penalties, the court in Dunlap concluded that plaintiffs who bring a private action under Labor Code § 218 may seek statutory penalties without exhausting the PAGA’s administrative remedies.

L. “Suitable Seating” for Employees

PAGA penalties also are available for technical wage order violations that do not involve underpaid employees. As an example, for nearly 100 years, California law has required employers to provide employees with seats while they work in certain circumstances. California law requires retail and most other employers to provide employees with seats either while they are working or, if the nature of their work requires standing, when use of seats does not interfere with the performance of their duties. See, e.g., I.W.C. Wage Order 7-2001 (retail industry), § 14. The Wage Orders also provide a penalty provision for their violation. See, e.g., I.W.C. Wage Order 7-2001, § 20. Plaintiffs have contended that this alleged violation of section 14(a) also violates California Labor Code section 1198, which makes it a misdemeanor for an employer to “require[] … any employee to work … under conditions of labor prohibited by [the wage orders].” Because Labor Code section 1198 does not provide penalties for its violation, the plaintiffs in most of these cases seek to recover the “stop-gap” civil penalties under section 2699(f) of PAGA. PAGA section 2699(f) “stop-gap” penalties are available for Labor Code violations “for which [no] civil penalty is specifically provided”; they consist of penalties of $100 for each aggrieved employee per pay period for initial violations and $200 for each aggrieved employee for subsequent violations. Section 2699(f) penalties are assessable only for violations that occurred within the last year before a lawsuit is filed and continuing until violations cease. See Cal. Civ. Proc. Code § 340.

Despite this long-standing “suitable seating” rule, there have been few agency or court opinions regarding its application and enforcement, and even fewer cases litigated over the issue. Two appellate courts held that employees may recover penalties under the PAGA, Cal. Lab. Code § 2698 et seq., from employers who violate the seats requirement. See Bright v. 99¢ Only Stores, 189 Cal. App. 4th 1472, 1480-82, 118 Cal. Rptr. 3d 723 (2010) (despite an initial dismissal at the trial court level, the California Court of Appeal reversed, concluding that the plaintiff could seek penalties under section 2699(f) for wage order violations, including violations of section 14). Accord Home Depot U.S.A., Inc. v. Superior Court, 191 Cal. App. 4th 210, 218-19, 120 Cal. Rptr. 3d 166 (2010) (affirming the trial court’s overruling of the defendant’s demurrer and following 99¢ Only Stores in concluding that failure to provide seating under Wage Order 7-2001 is subject to the default civil remedies imposed under section 2699(f)).

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The Court of Appeal in both 99¢ Only Stores and Home Depot reasoned that section 2699(f) establishes civil penalties for violations of “all provisions of [the Labor Code] except those for which a civil penalty is specifically provided,” and section 1198 fits this exception: section 1198 makes unlawful an employer’s failure to provide seating as required under Wage Order 7-2001, but no corresponding civil penalty is “specifically provided” in section 1198 or elsewhere. As the Court of Appeal in Home Depot noted, the key issue on appeal was whether the “default” remedy provided by PAGA section 2699(f) encompassed violations of section 1198 and Wage Order 7-2001, to the extent that they mandate that employers supply seating to employees. The Court of Appeal held that section 2699(f) did encompass such violations, noting its agreement with the reasoning set forth in the 99¢ Only Stores decision of the same appellate district. Id. at 218.

In Home Depot, the Court of Appeal rejected both of Home Depot’s primary arguments as to why section 2699(f)’s default remedy should not cover alleged violations of seating requirements. First, Home Depot pointed to the prohibitory language of section 1198, that employing employees “under conditions of labor prohibited by the order is unlawful.” Id. at 21820. Home Depot argued that because Wage Order 7-2001’s seating requirement is expressed in affirmative terms (employees “shall” be provided adequate seating), instead of in prohibitory terms, an employer’s failure to comply with the seating requirement is not unlawful under section 1198’s language. Id. The court rejected this argument as flawed because, inter alia, it effectively meant that mandatory labor conditions would have to be treated merely as recommendations or suggestions if affirmative language is used instead of prohibitory language—a result inconsistent with section 1198’s remedial purpose, and an argument also rejected in 99¢ Only Stores. Id.

Second, Home Depot pointed to the express language of section 2699(f), which stated that it provided a remedy “[f]or all provisions of this code except those for which a civil penalty is specifically provided.” Id. at 222. Home Depot argued that Wage Order 7-2001 specifically provided its own remedy, so that section 2699(f)’s default remedy was inapplicable. Id In particular, Home Depot focused on section 20(A) of Wage Order 7-2001, which establishes $50 and $100 penalties in cases in which an employee “was underpaid.” Id. Home Depot argued that these penalties applied to the entirety of Wage Order 7-2001, including for seating violations. Id. The Court of Appeal disagreed. Id. at 223.

Reviewing the language of section 20(A), the Court said it established monetary penalties only for the underpayment of wages, not for seating violations. As such, the default remedy of section 2699(f) applied. Id. The court also: found its interpretation consistent with the legislative history of PAGA; refused Home Depot’s suggestion to apply a rule of strict construction, like that applicable to penal statutes, to PAGA; and rejected Home Depot’s argument that by supplementing section 20(A)’s penalties with section 2699(f)’s default penalty, an employer could, nonsensically, end up paying twice as much for a seating violation as for an underpayment of wages violation when both were covered by the same Wage Order. Id. at 224-25. On this last point, employing a constitutional analysis to Home Depot’s contention that seating violations could result in unreasonable and

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excessive penalties, the court said that a penalty provision is facially constitutional if it could be applied in a constitutional manner. Id. at 225. Here, section 2699(e)(2) affords courts the authority to award “a lesser amount than the maximum civil penalty amount specified . . . if, based on the facts and circumstances of the particular case, to do otherwise would result in an award that is unjust, arbitrary and oppressive, or confiscatory.” Id. Thus, the default penalties of 2699(f), even supplementing Wage Order 7-2001’s section 20(A) penalties, were not excessive or improper. Id. As a result, the court said that the first amended complaint properly pled a PAGA claim, the trial court properly overruled Home Depot’s demurrer, and the petition for writ of mandate or other relief was denied. Id.

One district court opinion that addressed the merits of a seats claim granted the employer summary judgment. In Kilby v. CVS Pharmacy, Inc., No. 09cv2051-MMA (KSC), 2012 U.S. Dist. LEXIS 76507 (S.D. Cal. May 31, 2012), the key issue was whether the “nature of the work” of a clerk/cashier at a CVS pharmacy reasonably permitted the use of seats. CVS contended that the court should consider the nature of an employee’s job as a whole, while plaintiff claimed the proper inquiry was whether any particular duty that an employee performed—here, operating a cash register—could be done while seated. Id. at *9-10. The court discussed the structure of section 14 and found that subsection (A), which requires the provision of seats when the nature of the work reasonably permits the use of seats, and subsection (B), which directs that seats be placed in reasonable proximity to the work area where the nature of the work requires standing, were mutually exclusive. Id. at *13. The court therefore rejected plaintiff’s position, since if the “nature of the work” could be defined by any one of a number of job duties, then a single employee could fall within both subsections during a single shift. Id. Instead, the “nature of the work” must be considered based on an employee’s entire range of assigned duties. Id. at *14. Here, clerk/cashiers performed many duties that required standing, such as stocking shelves, helping customers locate items away from the cash registers, and cleaning. Id. Furthermore, an employer’s business judgment was relevant in determining the nature of an employee’s work. Id. at *16.

A California court of appeal has handed down a decision containing an extraordinarily broad interpretation of PAGA, permitting a plaintiff to recover unpaid wages on behalf of himself and other aggrieved employees as part of the PAGA civil penalty, not in addition to the civil penalty. In Thurman v. Bayshore Traffic Management, Inc., 203 Cal. App. 4th 1112 (Feb. 27, 2012), a bus driver brought a PAGA representative action against his employer, a transit operator, alleging meal and rest break violations. Although no class was ever certified, the trial court awarded over $358,000 in PAGA penalties against the employer after a bench trial. The court awarded the civil penalties pursuant to Labor Code section 558, which provides, in pertinent part, that an employer who violates “a section of this chapter [Labor Code sections 500 to 558] or any provision regulating hours and days of work in any order of the Industrial Welfare Commission” is subject to a civil penalty, for an initial violation, of $50 for each underpaid employee for each pay period for which the employee was underpaid “in addition to an amount sufficient to recover underpaid wages.” The penalty increases to $100 for each subsequent violation “in addition to an amount

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sufficient to recover underpaid wages.” The statute further provides that “[w]ages recovered pursuant to this section shall be paid to the affected employee.” Cal. Lab. Code § 558(a).

On appeal from the trial court’s award, the Court of Appeal held that a representative plaintiff in a PAGA action can recover unpaid wages under Section 558 for meal and rest break violations, in addition to recovering the per-pay-period civil penalties specified in the statute. Under the court’s ruling, the wages are, in essence, part of the penalty, not a separate form of restitution outside PAGA. Moreover, the court found that the unpaid wage portion of the penalty is payable, in its entirety, to the employees, rather than being divided 75% to the State of California Labor and Workforce Development Agency and 25% to the aggrieved employees, as applies to PAGA penalties generally. Regarding claims for rest break premiums, the court found that even though there is no rest break statute in the applicable Labor Code chapter covered by Section 558, a plaintiff nonetheless is permitted to recover rest break premiums as a penalty under Section 558 based on the statutory reference to IWC wage order provisions that regulate “hours and days of work.” The court interpreted the wage order provisions governing rest breaks as falling within this provision.

The California Supreme Court denied the employer’s petition for review on June 13, 2012. Thurman v. Bayshore Transit Mgmt., No. S201442, 2012 Cal. LEXIS 5624 (Cal. June 13, 2012).

Because PAGA representative actions need not be certified as class actions, the net effect of the ruling in Thurman is that plaintiffs now may pursue certain wage-and-hour claims under PAGA, and seek recovery of unpaid wages in addition to other monetary penalties, without having to obtain class certification from a court and without having to divide any wage recovery with the State of California.

M. Settlement Procedures

A California Court of Appeal ruled in 2009 that employers and employees may settle bona fide disputes over California wage claims without D.L.S.E. or court supervision. Chindarah v. Pick Up Stix, Inc., 171 Cal. App. 4th 796, 90 Cal. Rptr. 3d 175 (2009), review denied, No. S171864 (June 10, 2009). In Pick Up Stix, two former employees brought a class action alleging unpaid overtime and related claims. Following a failed mediation, the employer contacted the putative class members directly and offered them private settlement agreements in exchange for a release of claims. Many of the putative class members signed the agreements. However, after signing the settlement agreements, eight current and former employees joined the class action as plaintiffs, arguing that their releases were ineffective under Labor Code § 206.5. That section provides, in pertinent part: “An employer shall not require the execution of a release of a claim or right on account of wages due . . . unless payment of those wages has been made.” (Emphasis added.) The court of appeal rejected the plaintiffs’ argument that the releases were unlawful under Section 206.5, holding that no wages were “due” within the meaning of Section 206.5 because the parties had a “bona fide dispute” over whether the wages were owed. Id. at 803. The court also rejected the

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plaintiffs’ argument that the Labor Code should be interpreted in the same way as the FLSA on this issue. The courts have interpreted the FLSA as requiring Department of Labor supervision of settlements, although the FLSA itself does not expressly require D.O.L. supervision. Based on the California Supreme Court’s denial of review in Pick Up Stix, employers and employees may settle bona fide disputes over California wage and hour claims without D.L.S.E. or court supervision. However, to ensure the validity of any such settlements, employers must proceed carefully and with advice of counsel, especially when attempting to directly settle claims after a court action has been filed.

N. Application of California’s Wage-and-Hour Laws to Business Travelers Based in Other States

The California Supreme Court has examined the applicability of California’s daily overtime provisions to nonresident employees who perform work both in California and in other states for a California-based employer. The case, Sullivan v. Oracle Corp., 51 Cal. 4th 1191, 127 Cal. Rptr. 3d 185 (2011), was filed by three former employees of Oracle. Two of the plaintiffs resided in Colorado and the third in Arizona. The plaintiffs worked mainly in their home states, but their jobs for Oracle required them to travel occasionally to California or other states to train Oracle’s customers in the use of the company’s products. During the three-year period from 2001 to 2004, one of the plaintiffs worked a total of 74 days in California, another worked 110 days, and the third worked 20 days.

Plaintiffs’ lawsuit in federal court alleged that Oracle should have paid them overtime under California’s daily overtime statute, Labor Code § 510, for the days they worked in California, rather than applying the overtime laws of their respective home states. Relying on California’s Unfair Competition Law (“UCL”), Business & Professions Code section 17200, plaintiffs also asserted that Oracle, as a California-based employer, was liable for any unpaid F.L.S.A. overtime due for hours that plaintiffs worked in states other than California. Because these were unresolved matters of considerable importance, the Ninth Circuit Court of Appeals asked the California Supreme Court to decide them on certified questions. The State Supreme Court agreed to do so.

The Supreme Court concluded that California’s overtime laws “apply by their terms to all employment in the state, without reference to the employee’s place of residence.” Id. at 1197. The Court was unsympathetic to Oracle’s argument that such a rule will impose a huge practical burden on employers in having to potentially apply the various wage-and-hour laws of multiple states to employees who pass through different states on business travel for short periods of time within a workweek. Consequently, the Supreme Court concluded that plaintiffs could proceed with their claim for unpaid overtime for hours worked in California, both under Labor Code section 510 and under the UCL. However, the Supreme Court rejected plaintiffs’ UCL claim to the extent it was based on violations of the F.L.S.A. occurring in states other than California.

Upon return of the case from the California Supreme Court, the Ninth Circuit adopted the Supreme Court’s holdings, reversing summary judgment for Oracle on the

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unpaid California overtime claims under Labor Code section 510 and the UCL, but affirming dismissal of plaintiffs’ UCL claim for unpaid F.L.S.A. hours worked outside of California. Sullivan v. Oracle Corp., 662 F.3d 1265 (9th Cir. Dec. 13, 2011).

The holding in this case on the claims for unpaid California overtime will, unfortunately, place an administrative burden on employers – the Supreme Court’s contrary view notwithstanding – in attempting to administer multiple federal and state overtime laws to business travelers, often for work they perform within a single workweek. Because the Supreme Court relied in part on the fact that Oracle is based in California, it is unclear whether the Court would apply the same rule to work performed by a nonresident in California where the employer is headquartered elsewhere.

The Supreme Court limited its holding in Sullivan to claims under California’s overtime laws, not needing to reach the applicability of California’s myriad other Labor Code provisions to nonresident business travelers. However, the case is likely to engender additional litigation, as nonresidents seek to have other employee-friendly California wage-and-hour laws applied to them, not only its daily overtime laws.

In Wright v. Adventures Rolling Cross Country, Inc., No. C-12-0982 EMC, 2012 U.S. Dist. LEXIS 104378 (N.D. Cal. May 3, 2012), trip leaders who spent ten days training in California and then led youths on tours in foreign countries alleged claims under the F.L.S.A. and California law. The court noted that the F.L.S.A. expressly exempts from its coverage work performed in a foreign country and granted defendant’s motion to dismiss to the F.L.S.A. claim to the extent it was based on work performed abroad, but denied the motion to the extent it was based on the work performed in California. Id. at *8.

The court similarly found that plaintiffs had viable California Labor Code claims based on their work performed in California, but not for work performed outside of California. The court acknowledged California’s long-standing presumption against extraterritorial application, id. at *13, and noted that the legislature expressly provided for extraterritorial application elsewhere in the Labor Code, such as for workers’ compensation, id. at *14. The court rejected plaintiffs’ argument that their employment agreements, which stated they were California residents and subject to California’s tax laws and regulations, contained a choice-of-law provision; even if it had, nothing indicated parties did not intend to also incorporate California’s presumption against extraterritoriality. Id. at *11-12.

O. The Wage Theft Prevention Act

In October 2011, Governor Brown signed into law the Wage Theft Prevention Act, which took effect on January 1, 2012. This bill established a host of new, increased civil and criminal penalties and remedies for an employer’s violation of California’s wage-and-hour laws. Modeled after a similar law in New York, this is one of the most sweeping legislative acts affecting California employers.

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Among other things, the Act added a new section of the Labor Code, Section 2810.5, that requires employers to provide detailed written disclosures to new and current employees in a variety of circumstances. Specifically, employers are required to provide each employee, at the time of hiring, with a written notice containing the following information: (1) the rate or rates of pay “and basis thereof,” whether paid by the hour, shift, day, week, salary, piece, commission, or otherwise, including any rates for overtime, as applicable; (2) allowances, if any, claimed as part of the minimum wage, including meal or lodging allowances; (3) the regular payday designated by the employer in accordance with the requirements of the Labor Code; (4) the name of the employer, including any “doing business as” names used by the employer; (5) the physical address of the employer’s main office or principal place of business, and a mailing address, if different; (6) the telephone number of the employer; (7) the name, address, and telephone number of the employer’s workers’ compensation insurance carrier; and (8) any other information the Labor Commissioner deems material and necessary.

Additionally, employers are required to notify their incumbent employees in writing of any changes to the information set forth above within seven calendar days after the time of the changes, unless all such changes are reflected on a timely earnings statement furnished in accordance with the pay stub law, Labor Code § 226, or in some other written document required by law within seven days of the changes.

These disclosures do not need to be provided to employees who are exempt from overtime or to employees who are covered by a valid collective bargaining agreement if the agreement expressly provides for the wages, hours of work, and working conditions of the employee, and if the agreement provides premium wage rates for all overtime hours worked and a regular hourly rate of pay for those employees of not less than 30% more than the state minimum wage.

In late December 2011, the Labor Commissioner prepared and posted on its website a template notice form based on its interpretation of these disclosure requirements. In December 2011, January 2012 and April 2012, the Labor Commissioner also published four different versions of FAQs interpreting and applying the requirements of this law. Also, in April 2012 the Labor Commissioner issued a revised template notice form, which is somewhat more condensed than its prior notice form and which, among other things, makes it optional for employers to include an acknowledgment section containing signature lines for employees and employer representatives. Unfortunately, the Labor Commissioner’s FAQs and template form still raise a number of unanswered questions and have engendered confusion as to how and when employers must properly satisfy the statute’s disclosure requirements in a variety of fact situations. As a result, the Wage Theft Prevention Act likely will spawn litigation to resolve these unanswered questions.

P. Reporting Time Pay

The I.W.C. Wage Orders contain the following provision regarding the payment of reporting time pay:

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Each workday an employee is required to report for work and does report, but is not put to work or is furnished less than half said employee’s usual or scheduled day’s work, the employee shall be paid for half the usual or scheduled day’s work, but in no event for less than two (2) hours nor more than four (4) hours, at the employee’s regular rate of pay, which shall not be less than the minimum wage.

I.W.C. Wage Order No. 4-2001(5)(A).

Two courts have cleared up some confusion as to how employers are supposed to apply these reporting time rules in situations where employees report to work to attend meetings lasting less than two hours. In Aleman v. Airtouch Cellular, 209 Cal. App 4th 556 (2012), the employer required employees to attend periodic store meetings, each generally lasting an hour to an hour-and-a-half. The meetings were scheduled in advance. Occasionally the meetings occurred on an employee’s “off” day, in which case the employee reported to work solely to attend the meeting. On these days, the employer paid the employees for the time they spent attending the meetings, but did not pay them any additional reporting time pay.

Two employees brought a putative class action, alleging that the employer improperly failed to pay reporting pay on days when the employees reported to work solely to attend the store meetings. The plaintiffs argued that on each of these days, the employer owed them at least two hours’ wages, the minimum amount of reporting time pay due under the Wage Orders. Id. at 569. The court of appeal, however, rejected the plaintiffs’ argument and found that the plaintiffs were not entitled to any reporting time pay on these facts. Id. The court noted that the meetings were scheduled in advance, and thus the employees were scheduled to work only for one to one-and-a-half hours on the meeting days. The court noted that the meetings always lasted at least half as long as they were scheduled to last. Id. at 570. In other words, if a meeting was scheduled to last 1.5 hours, the employer never concluded the meeting and sent the employees home fewer than 45 minutes after commencing the meeting. Therefore, according to the court, the reporting time pay rules never were triggered, because the employees always worked at least “half the usual or scheduled day’s work”—in this case, half of the “scheduled” day’s work. Id.

Another case addressed a situation where an employee was called in to attend a meeting at work that was not scheduled in advance. In Price v. Starbucks Corp., 192 Cal. App. 4th 1136 (2011), plaintiff’s branch manager called him in to “come to the store to have a talk.” The plaintiff had not been scheduled to work a regular shift that day. The plaintiff reported to work and was notified in a short meeting that his employment was being terminated. According to the plaintiff, the meeting lasted about 45 seconds. The employer paid him two hours’ reporting time pay for that day.

In a subsequent lawsuit, the plaintiff alleged that the employer owed him more than two hours’ reporting time pay. Relying on the reference in the Wage Order to “half the

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usual or scheduled day’s work,” plaintiff argued that the employer owed him 3.3 hours’ pay, because plaintiff’s regularly-scheduled shifts in the days leading up to his termination had averaged 3.3 hours in length. The court of appeal, however, disagreed with the plaintiff’s interpretation and found that the employer had correctly paid him two hours’ reporting time pay. The court noted that on the day in question, the plaintiff did not report to work with the expectation that he would work a scheduled shift, but rather was scheduled to attend a meeting for an unspecified number of hours. According to the court, the reference to “usual” day’s work in the Wage Order refers to an employee’s expectation of the hours to be worked in a customary workday, not, as here, when employees are called in to work for a meeting on their day off. Id. at 1147.

Q. Split-Shift Premiums

The I.W.C. Wage Orders provide that non-exempt employees are entitled to premiums for working split shifts in certain circumstances. Specifically, the Wage Orders state:

When an employee works a split shift, one (1) hour’s pay at the minimum wage shall be paid in addition to the minimum wage for that workday, except when the employee resides at the place of employment.

I.W.C. Wage Order No. 4-2001(4)(C). The Wage Orders define a “split shift” as “a work schedule, which is interrupted by non-paid non-working periods established by the employer, other than bona fide rest or meal periods.” Id., subd. (2)(Q).

A California court of appeal has addressed whether a split-shift premium is due regardless of the amount the employee is paid for the hours worked during the workday, or instead whether the premium is due only to employees who are paid at or near the minimum wage during the workday. The court adopted the latter interpretation.

In Aleman v. Airtouch Cellular, supra (discussed above in connection with reporting time pay), the plaintiff claimed that his employer should have paid him split-shift premiums for five split shifts that he worked. 209 Cal. App 4th at 574. The plaintiff’s base hourly rate was $10.58 per hour. California’s minimum wage at the time he worked the split shifts was $6.75. At the relevant time, therefore, a minimum wage worker would be entitled to $54 for eight hours of work (8 x $6.75), but plaintiff always received at least $84.64 for eight hours of work (8 x $10.58). Id. at 575.

Under these circumstances, the court of appeal ruled that plaintiff was not entitled to a split-shift premium, because his total pay for each workday exceeded the minimum wage by more than $6.75. The court agreed with the employer’s argument that Section 4(C) of the Wage Order means that employees are entitled to one hour at the minimum wage in addition to the minimum wage for that workday – not the employee’s regular wage for that workday. Id.

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Earlier in 2011, a federal district court had reached the same interpretation in Galvez v. Federal Express Inc., 2011 WL 1599625 (N.D. Cal. 2011), but Aleman was the first California appellate court to address this issue in a published case. Consequently, under the court’s ruling, if a non-exempt employee works split shifts totaling eight hours at the current California minimum wage of $8 per hour ($64 for the day), the employee would be entitled to a split-shift premium of $8. An employee who is paid $8.50 per hour for eight hours of work and thus earns $68 for the day would be entitled to a split-shift premium of $4 for that day (the difference between $68 and $72). An employee who earns $72 or more for an eight-hour day would not be entitled to any split-shift premium, because the employee’s total pay for the day exceeded the minimum wage by $8 or more.

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SECTION 2: ARE YOUR “EXEMPT” EMPLOYEES PROPERLY CLASSIFIED?

One of the most hotly contested topics in the wage and hour field is the classification of employees as “exempt” from state and federal overtime compensation requirements. The three principal exemptions from the payment of overtime compensation are for executive, administrative and professional employees, although they are defined differently under California and federal law. Nevertheless, generally under both California and federal law, the determination of exempt status is based upon (1) the amount and method of compensation received, and (2) the employee’s duties. There also are special rules regarding the exempt status of computer programmers and analysts, commission sales employees and outside salespersons. Overall, the proper classification of employees as exempt or nonexempt is very much a fact-based determination.

I. THE “WHITE COLLAR” EXEMPTIONS

A. Federal Law

On August 23, 2004, the U.S. Department of Labor’s revisions to the F.L.S.A.’s white collar overtime regulations took effect. 29 C.F.R. §§ 541.0 et seq. The new regulations restated and clarified the exemption criteria, but retained the basic concept that, in order to classify an employee as exempt from overtime, an employer must show that the employee’s level and method of compensation meets a prescribed “remuneration” standard, and the employee’s duties meet the prescribed “primary duties” standard.

1. The Remuneration Standard

To be eligible for the administrative, professional, or executive exemptions under the F.L.S.A., employees generally must receive a guaranteed salary (or, in the case of administrative and professional employees, a “fee”) of at least $455.00 per week, exclusive of board, lodging or other facilities. 29 C.F.R. § 541.600.

Additionally, employees generally are not exempt from the overtime pay requirements unless they receive pay on a “salary basis,” meaning they regularly receive a predetermined amount of compensation which is not subject to reduction due to variations in the quality or quantity of work performed. 29 C.F.R. § 541.602. There are two exceptions to the “salary basis” requirement. First, the requirement does not apply to certain professionals, such as lawyers, physicians and teachers. 29 C.F.R. § 541.600(e). Second, the requirement does not apply to certain computer professionals who are paid at least $27.63 per hour for every hour worked. Id. § 541.213(a)(17).

Under the F.L.S.A.’s “salary basis” test, employees seeking overtime pay have argued that any potential or realized salary deductions destroy their exempt status. The regulations address in detail the circumstances under which salary deductions may result in the loss of exempt status for an employee or group of employees, as discussed more fully below.

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2. Primary Duty Standard

In addition to the salary standard, the federal exemptions also impose a “primary duty” standard. In brief, exempt status requires that an employee perform duties that are “primarily” executive, administrative or professional in character, even if these duties do not constitute a majority of the work activity. For example, under federal law, an employee could perform three separate duties: one that is clearly executive, administrative or professional in character and that consumes 40 percent of the work week; and two others that are clearly non-exempt in character and that each consume 30 percent of the work week. Because the primary duty is exempt, the employee qualifies for exempt status.4

The Ninth Circuit addressed the primary duty requirement where less than 50 percent of the employees’ time was spent on exempt work. Baldwin v. Trailer Inns, Inc., 266 F.3d 1104 (9th Cir. 2001). In Baldwin, plaintiffs were a husband and wife who had lived in and managed an RV park. Following the termination of their employment, plaintiffs claimed that they were owed over 2,000 hours of overtime, arguing that they had spent 90 percent of their time on non-exempt duties. The court agreed that the plaintiffs spent more than 50 percent of their time on manual tasks such as cleaning, maintenance, repairs, and paperwork that were “plainly nonexempt.” The court nevertheless concluded that the plaintiffs were exempt, due to the relative importance of their managerial duties compared to their nonexempt duties. “We do not presume that the executive exemption fails merely because the proportion of time spent on exempt managerial tasks is less than fifty percent, where, as here, managerial duties are packaged in employment with non-managerial tasks, and the management function cannot readily and economically be separated from the nonexempt tasks.” Id. at 1114 (citing Donovan v. Burger King Corp., 672 F.2d 221, 226 (1st Cir. 1982)). The court found that the plaintiffs’ “principal value” to their employer was in making day-to-day decisions for the facility and exercising managerial discretion. Furthermore, the plaintiffs were relatively free from daily supervision, a factor the court found “weighs heavily in favor of the exemption.” Id. at 1115.

3. Executive Employees

Under D.O.L. regulations, employees are deemed exempt as employed in a bona fide executive capacity if (1) they are compensated on a salary basis at a rate of not less than $455 per week, exclusive of board, lodging, or other facilities; (2) their primary duty is management of the enterprise in which they are employed or of a customarily recognized department or subdivision thereof; (3) they customarily and regularly direct the work of two or more other employees; and (4) they have the authority to hire or fire other employees or 4 Under California law, “primarily engaged” means more than one-half of the employee’s work time. Federal law, however, interprets “primary” to mean the major part of the employee’s work time, so an employee who devotes less than 50 percent of his or her work time to exempt duties may nonetheless be exempt under federal overtime pay requirements. Thus, California law employs a purely quantitative approach, whereas federal law employs a qualitative approach. However, where California and federal requirements are at variance, the more stringent requirement must be satisfied.

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their suggestions and recommendations as to the hiring, firing, advancement, promotion, or any other change of status of other employees are given particular weight. 29 C.F.R. § 541.100. The executive exemption also applies to business owners, defined as employees who own at least a bona fide 20 percent equity interest in the enterprise in which the employee is employed, regardless of whether the business is a corporate or other type of organization, and who are actively engaged in its management. Id. § 541.101. The current regulations remove the “sole charge” provision contained in the former regulations, under which employees who were in “sole charge of an independent establishment or a physically separated branch establishment” could be exempt under the executive exemption even though they exceeded the applicable percentage limitations on nonexempt work contained in the former regulations. See former 29 C.F.R. § 541.113.

“Management” under the current regulations includes, but is not limited to, activities such as interviewing, selecting, and training of employees; setting and adjusting their rates of pay and hours of work; directing the work of employees; maintaining production or sales records for use in supervision or control; appraising employees’ productivity and efficiency for the purpose of recommending promotions or other changes in status; handling employee complaints and grievances; disciplining employees; planning the work; determining the techniques to be used; apportioning the work among the employees; determining the types of materials, supplies, machinery, equipment, or tools to be used or merchandise to be bought, stocked and sold; controlling the flow and distribution of materials or merchandise and supplies; providing for the safety and security of the employees or the property; planning and controlling the subject; and monitoring or implementing legal compliance measures. 29 C.F.R. § 541.102.

A “customarily recognized department or subdivision” is intended to distinguish between a mere collection of employees assigned from time to time to a specific job or series of jobs and a unit with permanent status and function. A customarily recognized department or subdivision must have a permanent status and a continuing function. For example, a large employer’s human resources department might have subdivisions for labor relations, pensions and other benefits, equal employment opportunity, and personnel management, each of which has a permanent status and function. 29 C.F.R. § 541.103(a). When an enterprise has more than one establishment, the employee in charge of each establishment may be considered in charge of a recognized subdivision of the enterprise. Id. § 541.103(b). A recognized department or subdivision need not be physically within the employer’s establishment and may move from place to place. The mere fact that the employee works in more than one location does not invalidate the exemption if other factors show that the employee is actually in charge of a recognized unit with a continuing function in the organization. Id. § 541.103(c). Continuity of the same subordinate personnel is not essential to the existence of a recognized unit with a continuing function. An otherwise exempt employee will not lose the exemption merely because the employee draws and supervises workers from a pool or supervises a team of workers drawn from other recognized units, if other factors are present that indicate that the employee is in charge of a recognized unit with a continuing function. Id. § 541.103(d).

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The phrase “two or more other employees” refers to two full-time employees or their equivalent. One full-time and two half-time employees, for example, are equivalent to two full-time employees, as are four half-time employees. 29 C.F.R. § 541.104(a). The supervision can be distributed among two, three, or more employees, but each such employee must customarily and regularly direct the work of two or more other full-time employees or the equivalent. Thus, for example, a department with five full-time nonexempt workers may have up to two exempt supervisors if each such supervisor customarily and regularly directs the work of two of those workers. Id. § 541.104(b) An employee who merely assists the manager of a particular department and supervises two or more employees only in the actual manager’s absence does not meet this requirement. Id. § 541.104(c). An employee’s hours worked cannot be credited more than once for different executives. Thus, a shared responsibility for the supervisor of the same two employees in the same department does not satisfy this requirement. However, a full-time employee who works four hours for one supervisor and four hours for a different supervisor, for example, can be credited as a half-time employee for both supervisors. Id. § 541.104(d).

Concurrent performance of exempt and nonexempt work does not disqualify an employee from the executive exemption if the requirements for the exemption, as described above, are otherwise met. 29 C.F.R. § 541.106(a). Whether an employee meets the requirements of the exemption when the employee performs concurrent duties is determined on a case-by-case basis, based on such factors as the relative importance of the exempt duties as compared with other types of duties; the amount of time spent performing exempt work; the employee’s relative freedom from direct supervision; and the relationship between the employee’s salary and the wages paid to other employees for the kind of nonexempt work performed by the employee. Id. §§ 541.106(a), 541.700(a). Generally, exempt executives make the decision regarding when to perform nonexempt duties and remain responsible for the success or failure of business operations under their management while performing the nonexempt work. In contrast, the nonexempt employee generally is directed by a supervisor to perform the exempt work or performs the exempt work for defined time periods. An employee whose primary duty is ordinary production work or routine, recurrent or repetitive tasks cannot qualify for exemption as an executive. Id. § 541.106(a). For example, an assistant manager in a retail establishment may perform work such as serving customers, cooking food, stocking shelves and cleaning the establishment, but performance of such nonexempt work does not preclude the exemption if the assistant manager’s primary duty is management. Id. § 541.106(b). An assistant manager can supervise employees and serve customers at the same time, or simultaneously direct the work of other employees and stock shelves, without losing the exemption. Id. In contrast, a relief supervisor or working supervisor whose primary duty is performing nonexempt work on the production line in a manufacturing plant does not become exempt merely because the nonexempt production line employee occasionally has some responsibility for directing the work of other nonexempt production line employees when, for example, the exempt supervisor is unavailable. Id. § 541.106(c). Similarly, an employee whose primary duty is to work as an electrician is not an exempt executive even if the employee also directs the work of other employees on the job site, orders parts and materials for the job, and handles requests from the prime contractor. Id.

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In an unpublished case, a California court of appeal held that an executive need not be the final decision maker or top employee in charge in order to qualify for the exemption. McNett v. Network Management Group, Inc., No. B224221, 2012 Cal. App. Unpub. LEXIS 6712 (Cal. Ct. App. Sept. 14, 2012), involved supervisors at casinos who supervised associates and reported to a senior manager. Plaintiffs claimed that supervisors could not qualify for the executive exemption because senior managers, not the supervisors, were in charge of the casinos. Id. at *8. The court noted that the current regulations no longer include a “sole charge” provision. Nothing in Wage Order 10 or the relevant federal regulations prohibited multiple persons from being in charge of an enterprise or department. The fact that there were multiple supervisors in some casinos and supervisors reported to the senior manager did not prevent supervisors from being exempt. Id. at *14. Furthermore, there was substantial evidence supervisors were “in charge,” rather than merely participating in management. Supervisors were responsible for all gaming operations in the casino; they scheduled and assigned duties to the associates; they trained, reviewed, and disciplined associates; they intervened in disputes between associates and casino patrons; and they were responsible for ensuring a safe environment and for enforcing company policy. Id. at *16. The court therefore affirmed the trial court’s holding that supervisors were exempt executives. Id. at *2.

4. Administrative Employees

Under D.O.L. regulations, an employee is exempt as an “employee employed in a bona fide administrative capacity” if (1) he or she is compensated on a salary or fee basis at a rate of not less than $455 per week, exclusive of board, lodging, or other facilities; (2) his or her primary duty is the performance of office or non-manual work directly related to the management or general business operations of the employer or the employer’s customers; and (3) his or her primary duty includes the exercise of discretion and independent judgment with respect to matters of significance. 29 C.F.R. § 541.200.

The phrase “directly related to the management or general business operations” refers to the type of work performed by the employee. To meet this requirement, an employee must perform work directly related to assisting with the running or servicing of the business, as distinguished, for example, from working on a manufacturing production line or selling a product in a retail or service establishment. 29 C.F.R. § 541.201(a). This includes, but is not limited to, work in functional areas such as tax; finance; accounting; budgeting; auditing; insurance; quality control; purchasing; procurement; advertising; marketing; research; safety and health; personnel management; human resources; employee benefits; labor relations; public relations; government relations; computer network, internet and database administration; legal and regulatory compliance; and similar activities. Some of these activities may be performed by employees who also would qualify for another exemption. Id. § 541.201(b). An employee may qualify for the administrative exemption if the employee’s primary duty is the performance of work directly related to the management or general business operations of the employer’s customers. Thus, for example, employees acting as advisers or consultants to their employer’s clients or customers (as tax experts or financial consultants, for example) may be exempt. Id. § 541.201(c).

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The exercise of discretion and independent judgment generally involves the comparison and the evaluation of possible courses of conduct, and acting or making a decision after the various possibilities have been considered. 29 C.F.R. § 541.202(a). The phrase “discretion and independent judgment” is to be applied in the light of all the facts involved in the particular employment situation in which the question arises, considering such factors as whether the employee has authority to formulate, affect, interpret, or implement management policies or operating practices; whether the employee carries out major assignments in conducting the operations of the business; whether the employee performs work that affects business operations to a substantial degree, even if the employee’s assignments are related to operation of a particular segment of the business; whether the employee has authority to waive or deviate from established policies and procedures without prior approval; whether the employee has authority to negotiate and bind the company on significant matters; whether the employee provides consultation or expert advice to management; whether the employee is involved in planning long-term or short-term business objectives; whether the employee investigates and resolves matters of significance on behalf of management; and whether the employee represents the company in handling complaints, arbitrating disputes, or resolving grievances. Id. § 541.202(b).

The regulations clarify that the exercise of discretion and independent judgment must be more than the use of skill in applying well-established techniques, procedures or specific standards described in manuals or other sources. 29 C.F.R. § 541.202(e). However, the mere fact that an employee uses manuals, guidelines or other established procedures containing or relating to highly technical, scientific, legal, financial, or other similarly complex matters that can be understood or interpreted only by those with advanced or specialized knowledge or skills, does not preclude exemption. Id. § 541.704. The exercise of discretion and judgment does not include clerical or secretarial work, recording or tabulating data, or performing other mechanical, repetitive, recurrent or routine work. Id. § 541.202(e). The fact that many employees perform identical work or work of the same relative importance does not mean that the work of each such employee does not involve the exercise of discretion and independent judgment with respect to matters of significance. Id. § 541.202(d). The exercise of discretion and independent judgment implies that the employee has authority to make an independent choice, free from immediate direction or supervision. However, employees can exercise discretion and independent judgment even if their decisions or recommendations are reviewed at a higher level. Id. § 541.202(c). An employee does not exercise discretion and independent judgment with respect to matters of significance merely because the employer will experience financial losses if the employee fails to perform the job properly. Id. § 541.202(f).

The regulations contain a number of specific examples of jobs that the D.O.L. deems to meet or not meet the requirements for the administrative exemption. Specifically, the regulations discuss insurance claims adjusters, employees in the financial services industry, persons who lead teams or other employees in major projects, executive or administrative assistants, human resources managers, purchasing agents, inspectors,

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examiners or graders, comparison shoppers for retail stores, and public sector investigators. See 29 C.F.R. § 541.203.5

The administrative exemption also applies to employees (1) who are compensated on a salary or fee basis at a rate of not less than $455 per week, exclusive of board, lodging, or other facilities, or on a salary basis which is at least equal to the entrance salary for teachers in the educational establishment by which employed; and (2) whose primary duty is performing administrative functions directly related to academic instruction or training in an educational establishment or department or subdivision thereof. 29 C.F.R. § 541.204.

Prior to August 23, 2004, when the old D.O.L. overtime regulations were in effect, exempt administrative status was based on the application of a “short” or “long” test, depending on the amount of the employee’s earnings. Under the “short test,” an employee was deemed exempt as employed in a bona fide administrative capacity if (1) he or she was compensated on a salary or fee basis at a rate of not less than $250 per week (exclusive of board, lodging, or other facilities); (2) his or her primary duty consisted of either (a) the performance of office or nonmanual work directly related to management policies or general business operations of the employer or its customers, or (b) the performance of functions in the administration of a school system or educational establishment or institution, or of a department or subdivision thereof, in work directly related to the academic instruction or training carried on therein; and (3) the performance of his or her primary duty included work requiring the exercise of discretion and independent judgment. See former 29 C.F.R. §§ 541.2(a), (e)(2), 541.214.

Under the “long test,” an employee who was compensated on a salary or fee basis at a rate of less than $250 per week, but at least $155 per week, was exempt if, in addition to meeting the above requirements regarding primary duties, he or she (1) customarily and regularly exercised discretion and independent judgment; (2)(a) regularly and directly assisted a proprietor or an employee employed in a bona fide executive or administrative capacity; or (b) performed, under only general supervision, specialized or technical work requiring special training, experience, or knowledge; or (c) executed under only general supervision special assignments and tasks; and (3) devoted no more than 20 percent of the hours in a workweek to other activities, or, in the case of an employee of a retail or service establishment, no more than 40 percent of the hours in a workweek to other activities. See former 29 C.F.R. §§ 541.2(b)-(d), (e)(1).

5 Significantly, the regulations state that employees in the financial services industry “generally meet the duties requirements for the administrative exemption if their duties include activities such as collecting and analyzing information regarding the customer’s income, assets, investments, or debts; determining which financial products best meet the customer’s needs and financial circumstances; advising the customer regarding the advantages and disadvantages of different financial products; and marketing, servicing or promoting the employer’s financial products. However, an employee whose primary duty is selling financial products does not qualify for the administrative exemption.” 29 C.F.R. § 541.203(b).

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In Bothell v. Phase Metrics, Inc., 299 F.3d 1120 (9th Cir. 2002), decided under the old D.O.L. regulations, the Ninth Circuit examined the exempt status under the F.L.S.A. and California state law of a field service engineer for a company that designed, manufactured, and sold robotic test and inspection equipment for the data storage industry. The employee worked with only one of the employer’s clients, and the parties disputed whether the customer service he provided was “administrative,” so as to exempt him from the wage and overtime requirements of the F.L.S.A. Under the “primary duty” prong of the “short test,” the court found that the customer service activities he performed went to the heart of the employer’s marketplace offerings, not to the internal administration of its business or that of its client for whom he provided the service. Id. at 1125-28. Under the “substantial importance” prong, according to the court, because the record could support the conclusion that the employee was essentially a highly skilled repairman, it was premature to conclude at the summary judgment stage that his work was “substantially important” to the management or operation of either the employer or its client. Id. at 1128-29. Under the “discretion and independent judgment” prong, the court found that there were genuine issues of fact regarding the extent to which the employee was permitted to make decisions and the importance of the decisions over which he had control. Id. at 1129-30.

In this case, the Ninth Circuit rendered two holdings of critical importance to the analysis of the administrative exemption. First, it held that the regulatory mandate that an employee perform duties related to the general business operations of an employer or an employer’s customers includes the requirement that the employee play a role in “running the business itself or determining its overall course or policies.” Id. at 1125. Whether this interpretation raises the bar for finding exempt administrative status depends upon whether the phrase “running the business itself” is the functional equivalent of its counterpart phrase (“or determining its overall course or policies”) or something less difficult to satisfy.

Second, Bothell held that the administrative/production dichotomy does not set an absolute bar to a finding of administrative status, as a California Court of Appeal held in Bell v. Farmers Insurance Exchange, 87 Cal. App. 4th 805, 105 Cal. Rptr. 2d 59 (2001), cert. denied, 534 U.S. 1041 (Nov. 26, 2001). Rather, the administrative/production distinction “should only be employed as a tool towards answering the ultimate question, whether work is ‘directly related to management policies or general business operations,’ not as an end in itself.” Bothell, 299 F.3d at 1127 (citation omitted). Because both federal and state case law analysis of this dichotomy find their source in the same passage from the Code of Federal Regulations, this split of authority leaves practitioners (both plaintiffs and defendants) with competing arguments, but no clear resolution of their dispute.

The first of these two holdings – that administrative employees must play a role in “running the business itself or determining its overall course or policies”—has been rejected by the California Supreme Court in its decision in Harris v. Superior Court, 53 Cal. 4th 170 (Dec. 30, 2011), at least insofar as it purports to apply the administrative exemption under California state law. Harris also casts doubt on the validity of Bothell’s reasoning under the F.L.S.A. The Harris case is described more fully below in the discussion of cases applying the administrative exemption under California law.

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In In re Farmers Insurance Exchange, Claims Representatives’ Overtime Pay Litigation, 481 F.3d 1119 (9th Cir. 2007), the Ninth Circuit held that claims adjusters for Farmers Insurance Exchange (“FIE”) were administratively exempt from the overtime requirements of the F.L.S.A. The claims adjusters exercised the requisite discretion and independent judgment where they determined coverage, recommended reserves, conducted investigations, negotiated settlements, advised FIE regarding fraud indicators and potential subrogation, and communicated with opposing counsel and FIE’s counsel. Id. at 1130. Their use of computer software to estimate claims did not eliminate the need for discretion and judgment. Id. In addition, the court found that the duties of the claims adjusters were directly related to the general business operations of FIE. Id. at 1131-32. This result is contrary to that reached by a California court in another case involving Farmers Insurance and its claims representatives litigated under California law. See Section 2.1.B.2.b, infra, for a discussion of Bell v. Farmers Ins. Exch., 87 Cal. App. 4th 805, 105 Cal. Rptr. 2d 59 (2001), cert. denied, 534 U.S. 1041 (Nov. 26, 2001).

The Eighth Circuit has found that an insurance company had properly classified a claims coordinator as administratively exempt under the F.L.S.A. In McAllister v. Transamerica Occidental Life Ins. Co., 325 F.3d 997 (8th Cir. 2003), the plaintiff argued that she did not exercise discretion or independent judgment because she was constrained to follow the company’s detailed claims manuals. The court found, however, that just because she was required to follow detailed manuals did not mean she did not exercise discretion and independent judgment. Rather, according to the court, the manuals did not cover everything that arose during the workday; the evidence showed that the plaintiff was required to use “good common sense judgment” and to make “independent decisions based on what confronted her.”

Numerous federal cases have concluded that employees in a variety of occupations are administrative, not production workers. For example, in Webster v. Public School Employees of Washington, Inc., 247 F.3d 910, 915-16 (9th Cir. 2001), the Ninth Circuit rejected plaintiff’s argument that he performed production, as opposed to administrative work. Plaintiff worked as a union field representative employed by the Public School Employees of Washington, Inc. (“PSE”). Plaintiff spent most of his time negotiating collective bargaining agreements, explaining agreement proposals to members of the bargaining unit and presenting proposals to the school district representatives. He had authority to sign contract extension agreements, side letters, and interim agreements approved by the members. Plaintiff also was responsible for handling union member’s grievances and representing members in school board hearings. Plaintiff argued that because the “primary service goal of the bargaining unit is to secure collective bargaining agreements and [his] primary duty is to negotiate the agreements,” he performed production work, not administrative work. The court held that, given the importance of the issues decided by the collective bargaining agreement, plaintiff’s negotiations were “squarely within the scope of the exempt administrative work.” Id. at 916 (citing 29 C.F.R. § 541.205(d) (“labor relations consultants” were “examples of bona fide administrative employees who can qualify as exempt”)). The court further noted that its conclusion was supported by “a sensible application of the administrative work/production dichotomy. . . . If we were to accept [plaintiff’s] position

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and view the negotiation of agreements as the bargaining units’ production, then any work - including that of a president or CEO - for a legal entity that addresses primarily management or administrative concerns . . . would be production. This would defeat the purpose of the administrative exemption.” Id. Other cases are in accord. See, e.g., Smith v. Johnson & Johnson, 593 F.3d 280 (3d Cir. 2010) (holding that pharmaceutical sales representative, who encouraged doctors to prescribe a certain drug and who created strategic plans to structure her own work, was an exempt administrative employee); Jackson v. Alpharma, Inc., No. 07-3250, 2010 U.S. Dist. LEXIS 72435 at *13 (D.N.J. July 19, 2010) (following Smith, court found that pharmaceutical sales representatives who are engaged in “planning long- or short-term business objectives” related to the marketing of products within their own territories were exempt administrative employees); Hines v. Longwood Events, Inc., No. 1:08-CV-11653-PBS, 2010 U.S. Dist. LEXIS 62259, at *19-20 (D. Mass. June 23, 2010) (holding that sales managers who used their own discretion to “pitch” defendants’ venues to potential clients, respond to individualized client concerns and answer customer questions exercised sufficient discretion and independent judgment to fall within the administrative exemption). Other cases are in accord. See, e.g., Smith v. Johnson & Johnson, 593 F.3d 280 (3d Cir. 2010) (holding that pharmaceutical sales representative, who encouraged doctors to prescribe a certain drug and who created strategic plans to structure her own work, was an exempt administrative employee); Jackson v. Alpharma, Inc., No. 07-3250, 2010 U.S. Dist. LEXIS 72435, at *13 (D.N.J. July 19, 2010) (following Smith, court found that pharmaceutical sales representatives who are engaged in “planning long- or short-term business objectives” related to the marketing of products within their own territories were exempt administrative employees); Hines v. Longwood Events, Inc., No. 1:08-CV-11653-PBS, 2010 U.S. Dist. LEXIS 62259, at *19-20 (D. Mass. June 23, 2010) (holding that sales managers who used their own discretion to “pitch” defendants’ venues to potential clients, respond to individualized client concerns and answer customer questions exercised sufficient discretion and independent judgment to fall within the administrative exemption).

Other cases, however, have reached the opposite result. For example, in Davis v. JP Morgan Chase & Co., 587 F.3d 529, 534 (2d Cir. 2009), the court held that loan underwriters were not exempt administrative employees, because their primary duty was producing the company’s product—loans—by selling loan products and processing loan applications. In reaching its conclusion, the court noted that the company referred to the underwriters as production employees, and that the company measured the workers’ productivity based on the number of loans processed. Id. at 354-35. See also Reiseck v. Universal Commc’ns of Miami, 591 F.3d 101, 107-08 (2d Cir. 2010) (holding that magazine’s regional sales director was not exempt as an administrative employee, because ad sales were part of the employer’s product and the sales director’s primary duty was selling ads); In re Novartis Wage & Hour Litig., 611 F.3d 141 (2d Cir. 2010) (holding that pharmaceutical sales reps were not exempt administrative employees because the employer’s tight control over the reps’ interactions with physicians prevented them from exercise of discretion and independent judgment in performance of their duties); Jirak v. Abbott Labs., Inc., 716 F. Supp. 2d 740, 750 (N.D. Ill. 2010) (holding that sales reps who worked from a “call list,” were not “free from immediate direction,” were expected to adhere to company policies and deliver the Company’s “core messages,” could not create their own material or prepare or enter into contracts - and thus

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did not have the authority to bind defendant in significant matters - did not qualify for the administrative exemption).

The D.O.L. reached a similar conclusion when it issued its first Administrator’s Interpretation. See D.O.L. Administrator’s Interpretation No. 1 (March 24, 2010). The D.O.L. stated that employees who perform the typical job duties of a mortgage loan officer do not fall within the administrative exemption because: (1) their primary duties are making sales, and therefore they perform the production work of their employers, which do not relate to the internal management or general business operations of the company; and (2) a typical mortgage loan officer’s primary duty is not related to the management or general business operations of the employer’s customers.

As the these cases illustrate, the administrative/production dichotomy analysis is all over the map – making it difficult absent further guidance from the courts for an employer to conclude with confidence that any given employee will or will not be deemed a production worker.

Courts also have distinguished between “sales” and “administrative” duties in analyzing the administrative exemption. In Reiseck, 591 F.3d at 107-08, the court held that a magazine’s regional sales director was not exempt as an administrative employee, because ad sales were part of the employer’s product and the sales director’s primary duty was selling ads. The court addressed the distinction between “sales” and “administrative” duties: an employee making specific sales to individual customers is a salesperson; by contrast, an employee encouraging an increase in sales generally among all customers is an administrative employee. Id. at 107. The court thus concluded, “[Plaintiff’s] primary duty was to sell specific advertising space to clients. . . . [Thus], she is properly considered a ‘salesperson’ for the purposes of the F.L.S.A. and therefore does not fall under the administrative exemption to the overtime pay provisions of the FLSA.” Id. The court declined to consider the “outside sales” or “commissioned salesperson” exemptions, because the District Court had not considered them in the first instance. Id. at 108.

Finally, the analysis of the exercise of discretion and independent judgment continues to lead courts to different conclusions under the administrative exemption. In In re Novartis Wage & Hour Litigation, 611 F.3d 141, 155-57 (2d Cir. 2010), the court deferred to the D.O.L.’s interpretation of the administrative exemption, holding that pharmaceutical sales representatives were not exempt administrative employees, because the employer’s tight control over the representatives’ interactions with physicians prevented them from exercising discretion and independent judgment in the performance of their duties. The representatives did not have any authority to formulate, affect, interpret, or implement the employer’s management policies or operating practices, were not involved in planning the employer’s business objectives, did not carry out major assignments in conducting the operations of the employer’s business, and did not have any authority to commit the employer in matters having significant financial impact. Id. at 156.

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By contrast, in Smith v. Johnson & Johnson, 593 F.3d 280, 284-85 (3d Cir. 2010), the court held that the pharmaceutical sales representative, who encouraged doctors to prescribe a certain drug and who created strategic plans to structure her own work, was an exempt administrative employee. (The court relied on the District Court’s finding that the outside sales exemption was inapplicable. Id. at 283.) The plaintiff was required to form a strategic plan designed to maximize sales in her territory, which involved a high level of planning and foresight, and the strategic plan that she developed guided the execution of her remaining duties. Id. at 285. In addition, the plaintiff executed nearly all of her duties without direct oversight and described herself as the manager of her own business who could run her own territory as she saw fit. Id. Accord Jackson v. Alpharma, Inc., No. 07-3250, 2010 U.S. Dist. LEXIS 72435, at *13 (D.N.J. July 19, 2010) (following Smith, court found that pharmaceutical sales representatives who are engaged in “planning long- or short-term business objectives” related to the marketing of products within their own territories were exempt administrative employees); Hines v. Longwood Events, Inc., No. 1:08-CV-11653-PBS, 2010 U.S. Dist. LEXIS 62259, at *19-20 (D. Mass. June 23, 2010) (holding that sales managers who used their own discretion to “pitch” defendants’ venues to potential clients, respond to individualized client concerns and answer customer questions exercised sufficient discretion and independent judgment to fall within the administrative exemption).

The U.S. Supreme Court has held pharmaceutical sales representatives were exempt under the outside sales exemption. See Christopher v. SmithKline Beecham Corp., 132 S. Ct. 2156, 183 L. Ed. 2d 153 (2012) (discussion below).

5. Professional Employees

Under D.O.L. regulations, employees are exempt as “employed in a bona fide professional capacity” if (1) they are compensated on a salary or fee basis at a rate of not less than $455 per week, exclusive of board, lodging, or other facilities; and (2) their primary duty is the performance of work (i) requiring knowledge of an advanced type in a field of science or learning customarily acquired by a prolonged course of specialized intellectual instruction; or (ii) requiring invention, imagination, originality or talent in a recognized field of artistic or creative endeavor. 29 C.F.R. § 541.300. The regulations thus retain the distinction between “learned” and “artistic” professionals.

a. Learned Professionals

To qualify for the learned professional exemption, an employee’s primary duty must be the performance of work requiring advanced knowledge in a field of science or learning customarily acquired by a prolonged course of specialized intellectual instruction. 29 C.F.R. § 541.301(a). This primary duty test includes three elements: (1) the employee must perform work requiring advanced knowledge; (2) the advanced knowledge must be in a field of science or learning; and (3) the advanced knowledge must be customarily acquired by a prolonged course of specialized intellectual instruction. Id. § 541.301(a).

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The phrase “work requiring advanced knowledge” means work which is predominantly intellectual in character, and which includes work requiring the consistent exercise of discretion and judgment, as distinguished from performance of routine mental, manual, mechanical, or physical work. An employee who performs work requiring advanced knowledge generally uses the advanced knowledge to analyze, interpret, or make deductions from varying facts or circumstances. Advanced knowledge cannot be attained at the high school level. 29 C.F.R. § 541.301(b). The phrase “field of science or learning” includes the traditional professions of law, medicine, theology, accounting, actuarial computation, engineering, architecture, teaching, various types of physical, chemical and biological sciences, pharmacy and other similar occupations that have a recognized professional status, as distinguished from the mechanical arts or skilled trades where in some instances the knowledge is of a fairly advanced type, but is not in a field of science or learning. Id. § 541.301(c).

The phrase “customarily acquired by a prolonged course of specialized instruction” restricts the exemption to professions where specialized academic training is a standard prerequisite for entrance into the profession. The best prima facie evidence that an employee meets this requirement is possession of the appropriate academic degree. However, the word “customarily” means that the exemption is also available to employees in such professions who have substantially the same knowledge level and perform substantially the same work as the degreed employees, but who attained the advanced knowledge through a combination of work experience and intellectual instruction. Thus, for example, the learned professional exemption is available to the occasional lawyer who has not gone to law school, or the occasional chemist who is not the possessor of a degree in chemistry. However, the learned professional exemption is not available for occupations that customarily may be performed with only the general knowledge acquired by an academic degree in any field, with knowledge acquired through an apprenticeship, or with training in the performance of routine mental, manual, mechanical, or physical processes. The learned professional exemption also does not apply to occupations in which most employees have acquired their skill by experience rather than by advanced specialized intellectual instruction. 29 C.F.R. § 541.301(d).

The regulations provide examples of jobs that the D.O.L. deems to meet or not meet the requirements for the learned professional exemption. Specifically, the regulations discuss the circumstances under which registered or certified medical technologists, nurses, dental hygienists, physician assistants, accountants, chefs, paralegals, athletic trainers, and funeral directors may qualify for the exemption. Id.6

6 As to accountants, the regulations provide that “[c]ertified public accountants generally meet the duties requirements for the learned professional exemption. In addition, many other accountants who are not certified public accountants but perform similar job duties may qualify as exempt learned professionals. However, accounting clerks, bookkeepers, and other employees who normally perform a great deal of routine work generally will not qualify as exempt professionals.” 29 C.F.R. § 541.301(e)(5).

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b. Creative Professionals

To qualify for the creative professional exemption, an employee’s primary duty must be the performance of work requiring invention, imagination, originality, or talent in a recognized field of artistic or creative endeavor as opposed to routine mental, manual, mechanical, or physical work. The exemption does not apply to work which can be produced by a person with general manual or intellectual ability and training. 29 C.F.R. § 541.302(a). The work must be “in a recognized field of artistic or creative endeavor.” This includes such fields as music, writing, acting, and the graphic arts. Id. § 541.302(b).

The requirement of “invention, imagination, originality or talent” distinguishes the creative professions from work that primarily depends on intelligence, diligence, and accuracy. The duties of employees vary widely, and exemption as a creative professional depends on the extent of the invention, imagination, originality, or talent exercised by the employee. Determination of exempt status, therefore, must be made on a case-by-case basis. This requirement generally is met by actors, musicians, composers, conductors, and soloists; painters who at most are given the subject matter of their painting; cartoonists who are merely told the title or underlying concept of a cartoon and must rely on their own creative ability to express the concept; essayists, novelists, short-story writers and screen play writers who choose their own subjects and hand in a finished piece of work to their employers; and persons holding the more responsible writing positions in advertising agencies. This requirement generally is not met by a person who is employed as a copyist, as an “animator” of motion-picture cartoons, or as a retoucher of photographs, since such work is not properly described as creative in character. 29 C.F.R. § 541.302(c).

Journalists may satisfy the duties requirements for the creative professional exemption if their primary duty is work requiring invention, imagination, originality, or talent, as opposed to work which depends primarily on intelligence, diligence, and accuracy. Employees of newspapers, magazines, television and other media are not exempt creative professionals if they only collect, organize, and record information that is routine or already public, or if they do not contribute a unique interpretation or analysis to a news product. Thus, for example, newspaper reporters who merely rewrite press releases or who write standard recounts of public information by gathering facts on routine community events are not exempt creative professionals. Reporters also do not qualify as exempt creative professionals if their work product is subject to substantial control by the employer. However, journalists may qualify as exempt creative professionals if their primary duty is performing on the air in radio, television, or other electronic media; conducting investigative interviews; analyzing or interpreting public events; writing editorials, opinion columns, or other commentary; or acting as a narrator or commentator. 29 C.F.R. § 541.302(d).

c. Teachers

The professional exemption also applies to any employee whose primary duty is teaching, tutoring, instructing, or lecturing in the activity of imparting knowledge and who is employed and engaged in this activity as a teacher in an educational establishment by which

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the employee is employed. 29 C.F.R. §§ 541.204(b)(2), 541.303(a). The exemption applies whether or not teachers meet the salary requirements or the other criteria required for other learned or creative professionals generally, as discussed above. Id. § 541.303(d).

d. Practice of Law or Medicine

The professional exemption also applies to any employee who is the holder of (1) a valid license or certificate permitting the practice of law or medicine or any of their branches and is actually engaged in the practice thereof; or (2) the requisite academic degree for the general practice of medicine and is engaged in an internship or resident program pursuant to the practice of the profession. 29 C.F.R. § 541.304(a). This exemption applies whether or not the employee meets the salary requirements or the other criteria required for other learned or creative professionals generally, as outlined above. Id. § 541.304(d).

In the case of medicine, the exemption applies to physicians and other practitioners licensed and practicing in the field of medical science and healing or any of the medical specialties practiced by physicians or practitioners. The term “physicians” includes medical doctors including general practitioners and specialists, osteopathic physicians, podiatrists, dentists, and optometrists. 29 C.F.R. § 541.304(b). Employees engaged in internship or resident programs, whether or not licensed to practice prior to commencement of the program, qualify as exempt professionals if they enter such internship or resident programs after the earning of the appropriate degree required for the general practice of their profession. Id. § 541.304(c).

6. Highly Compensated Employees

An employee with total annual compensation of at least $100,000 is deemed exempt under the executive, administrative, or professional exemptions if the employee customarily and regularly performs any one or more of the exempt duties or responsibilities of an executive, administrative, or professional employee identified in the applicable D.O.L. regulations. 29 C.F.R. § 541.601(a).

“Total annual compensation” must include at least $455 per week on a salary or fee basis (29 C.F.R. § 541.601(b)(1)),7 and it also may include commissions, nondiscretionary bonuses and other nondiscretionary compensation earned during a 52-week period. 29 C.F.R. § 541.601(b)(1). If an employee’s total annual compensation does not total at least $100,000 by the last pay period of the 52-week period, the employer may, during the last pay period or within one month after the end of the 52-week period, make one final payment sufficient to achieve the required level. 29 C.F.R. § 541.601(b)(2).

An employee who does not work a full year for the employer, either because the employee is newly hired after the beginning of the year or ends the employment before the

7 Computer professionals who are paid by the hour may not, therefore, qualify for exemption under the provisions for highly compensated employees.

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end of the year, may qualify for exemption under these highly-compensated-employee provisions if the employee receives a pro rata portion of the required $100,000 minimum, based upon the number of weeks that the employee will be or has been employed. 29 C.F.R. § 541.601(b)(3). The employer may utilize any 52-week period as the year, such as a calendar year, a fiscal year, or an anniversary of hire year. If the employer does not identify some other year period in advance, the calendar year will apply. 29 C.F.R. § 541.601(b)(4).

7. Salary Basis

In most cases, as discussed above, an employee must be paid on a salary basis to qualify for exemption under the executive, administrative, or professional exemptions.8 In general, an employee will be considered to be paid on a “salary basis” if the employee regularly receives each pay period on a weekly, or less frequent basis, a predetermined amount constituting all or part of his or her compensation, which amount is not subject to reduction because of variations in the quality or quantity of the work performed. 29 C.F.R. § 541.602(a). Thus, subject to certain exceptions enumerated in the regulations, an employee must receive the full salary for any week in which he or she performs any work, without regard to the number of days or hours worked. Id. Exempt employees need not be paid for any workweek in which they perform no work. However, an employee is not paid on a salary basis if the employer makes deductions from the employee’s predetermined compensation for absences occasioned by the employer or by the operating requirements of the business. If the employee is ready, willing, and able to work, deductions may not be made for time when work is not available. Id.

The D.O.L. regulations list the following seven exceptions to the general prohibition against deductions from salary in increments of less than a full workweek:

(1) An employer may make deductions from pay in full-day increments when an exempt employee is absent from work for one or more full days for personal reasons, other than sickness or disability. 29 C.F.R. § 541.602(b)(1).

(2) An employer may make salary deductions in full-day increments for absences of one or more full days occasioned by sickness or disability (including work-related accidents) if it makes the deduction in accordance with a bona fide plan, policy, or practice of providing compensation for loss of salary occasioned by such sickness or disability. The employer is not required to pay any portion of the employee’s salary for full-day absences for which the employee receives compensation under the plan, policy, or practice. It may deduct for such full-day absences even though the employee has not yet qualified for benefits under the plan, policy, or practice, and after the

8 Administrative and professional employees also may be paid on a fee basis, and computer professionals also may be paid on an hourly basis. See 29 C.F.R. §§ 541.400(b), 541.600(a). Teachers and certain others in the medical and legal professions are exempt from the salary requirements. Id. §§ 541.303(d), 541.304(d).

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employee has exhausted the leave allowance thereunder. Similarly, an employer may make deductions from pay for absence of one or more full days if salary replacement benefits are provided under a state disability insurance law or workers’ compensation law. 29 C.F.R. § 541.602(b)(2).

(3) An employer may not make deductions from pay in less than full-week increments for absences occasioned by jury duty, attendance as a witness or temporary military leave, but can offset any amounts that the employee received as jury fees, witness fees, or military pay for a particular week against the salary due for that particular week. 29 C.F.R. § 541.602(b)(3).

(4) An employer may make deductions from pay for penalties imposed in good faith for infractions of safety rules of major significance. Safety rules of major significance include those relating to the prevention of serious danger in the workplace or to other employees, such as rules prohibiting smoking in explosive plants, oil refineries, and coal mines. 29 C.F.R. § 541.602(b)(4).

(5) An employer may make salary deductions for unpaid disciplinary suspensions of one or more full days imposed in good faith for infractions of workplace conduct rules, but only if it imposes the suspension pursuant to a written policy applicable to all employees. Thus, for example, an employer may suspend an exempt employee without pay for three days for violating a generally applicable written policy prohibiting sexual harassment, or for 12 days for violating a generally applicable written policy prohibiting workplace violence. 29 C.F.R. § 541.602(b)(5).

(6) An employer is not required to pay the full salary in the initial or terminal week of an employee’s employment. Rather, it may pay a proportionate part of the employee’s full salary for the time that the employee actually worked in the first and last week of employment, based on an hourly or daily equivalent of the employee’s full salary. 29 C.F.R. § 541.602(b)(6).

(7) An employer is not required to pay the full salary for weeks in which an exempt employee takes unpaid leave under the Family and Medical Leave Act. Rather, when an exempt employee takes unpaid leave under the F.M.L.A., the employer may pay a proportionate part of the full salary for the time that the employee actually worked. For example, if an employee who normally works 40 hours per week uses four hours of unpaid F.M.L.A. leave, the employer could deduct 10 percent of the employee’s normal salary that week. 29 C.F.R. § 541.602(b)(7).

The effect of making an improper salary deduction, depending on the circumstances, is loss of the employee’s exempt status and possibly that of other exempt employees in the same job classification. Specifically, according to the D.O.L. regulations, an employer who makes improper deductions from salary will lose the exemption if the facts demonstrate that

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the employer “did not intend to pay employees on a salary basis.” 29 C.F.R. § 541.603(a). An actual practice of making improper deductions demonstrates that the employer did not intend to pay employees on a salary basis. The factors to consider when determining whether an employer has an actual practice of making improper deductions, according to the regulations, include, but are not limited to: the number of improper deductions, particularly as compared to the number of employee infractions warranting discipline; the time period during which the employer made improper deductions; the number and geographic location of employees whose salary was improperly reduced; the number and geographic location of managers responsible for taking the improper deductions; and whether the employer has a clearly communicated policy permitting or prohibiting improper deductions. Id. § 541.603(a).

The regulations provide that if the facts demonstrate that the employer has an actual practice of making improper deductions, the exemption is lost during the time period in which the improper deductions were made for employees in the same job classification working for the same managers responsible for the actual improper deductions. Employees in different job classifications or who work for different managers do not lose their status as exempt employees. Thus, for example, if a manager at a company facility routinely docks the pay of engineers at that facility for partial-day personal absences, then all engineers at that facility whose pay could have been improperly docked by the manager would lose the exemption; engineers at other facilities or working for other managers, however, would remain exempt. 29 C.F.R. § 541.603(b). Improper deductions that are either isolated or inadvertent will not result in loss of the exemption for any employees subject to such improper deductions, if the employer reimburses the employees for such improper deductions. Id. § 541.603(c).

The regulations contain a “safe harbor” by which employers may protect themselves against continuing liability as a result of making one or more improper salary deductions under the D.O.L.’s salary basis rules. Specifically, if an employer (1) has a clearly communicated policy that prohibits the improper pay deductions specified in the regulations, (2) includes a complaint mechanism in the policy, (3) reimburses employees for any improper deductions, and (4) makes a good faith commitment to comply in the future, such employer will not lose the exemption for any employees unless the employer “willfully” violates the policy by continuing to make improper deductions after receiving employee complaints. 29 C.F.R. § 541.603(d). According to the regulations, if an employer fails to reimburse employees for any improper deductions or continues to make improper deductions after receiving employee complaints, the exemption is lost during the time period in which the improper deductions were made for employees in the same job classification working for the same managers responsible for the actual improper deductions. Id. The regulations state that the best evidence of a “clearly communicated policy” is a written policy that the employer distributed to employees prior to the improper pay deductions by, for example, providing a copy of the policy to employees at the time of hire, publishing the policy in an employee handbook, or publishing the policy on the employer’s intranet. Id.

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The D.O.L. regulations clarify that an employer is permitted to provide exempt employees with additional compensation beyond the guaranteed minimum salary of at least $455 per week, and doing so will not cause the employees to lose their exempt status. Thus, for example, if an employer guarantees an exempt employee at least $455 each week paid on a salary basis and also pays additional compensation based on hours worked beyond the normal workweek, the employer does not thereby lose the right to classify the employee as exempt. 29 C.F.R. § 541.604. The same is true if the employer pays the additional compensation by commissions, percentage of the profits, bonus, or any other basis, including paid time off. Id.

B. California Law

1. The Amount of Compensation Standard

The I.W.C. Wage Orders issued in January 2001 made it clear, for the first time, that the compensation standard under California law is a salary requirement. For example, I.W.C. Order 4-2001 states:

Such [exempt] employee must also earn a monthly salary equivalent to no less than two times the state minimum wage for full-time employment. Full-time employment is defined in Labor Code § 515(c) as 40 hours per week.

Id. at §§ 1.(A)(1)(f), 1.(A)(2)(g), 1.(A)(3)(d) (emphasis added). The I.W.C. Wage Orders do not expressly state how this “monthly salary” requirement is to be applied.

Clarification came on March 1, 2002 in a letter from Arthur Lujan to the I.W.C., confirming that there was no change in the “status quo” with respect to the existing salary requirement. According to the D.L.S.E., the “weekly standard” still governs, and an employee will be considered to be paid on a “monthly basis” if he or she regularly receives “each pay period, on a weekly, or less frequent basis, a predetermined amount constituting all or part of his or her compensation, which amount is not subject to reduction because of variations in the quality or quantity of the work performed.”

The I.W.C. Wage Orders issued in January 2001 also increased the salary requirement for the administrative, executive and professional exemptions under California law so that exempt employees must earn a monthly salary equivalent to no less than two times the minimum wage for full-time (forty hours per week) employment. Based on the current minimum wage rate, the monthly salary requirement is $2,773.33, or $33,280 annually.

According to the D.L.S.E., an employee will be considered to be paid on a “monthly basis” if he or she regularly receives “each pay period, on a weekly, or less frequent basis, a predetermined amount constituting all or part of his or her compensation, which amount is

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not subject to reduction because of variations in the quality or quantity of the work performed.”

2. The Duties Standard: A Fifty Percent Plus Rule

If the salary requirements are met, employees may be exempt from overtime compensation under California law only if they devote more than 50 percent of their work time to exempt duties. See Ramirez v. Yosemite Water Co., 20 Cal. 4th 785, 85 Cal. Rptr. 2d 844 (1999). Like federal law, California law provides three “white-collar” exemptions: executive, administrative and professional.

a. Executive Employees

California Wage Order 4-2001 defines a “person employed in an executive capacity” as any employee:

(a) Whose duties and responsibilities involve the management of the enterprise in which he or she is employed or of a customarily recognized department or subdivision thereof; and

(b) Who customarily and regularly directs the work of two or more other employees therein;9 and

(c) Who has the authority to hire or fire other employees or whose suggestions and recommendations as to the hiring or firing and as to the advancement and promotion or any other change of status of other employees will be given particular weight; and

(d) Who customarily and regularly exercises discretion and independent judgment; and

(e) Who is primarily engaged in duties which meet the test of the exemption. The activities constituting exempt work and non-exempt work shall be construed in the same manner as such items are construed in the following regulations under the Fair Labor Standards Act effective as of the date of this Order: 29 C.F.R. §§ 541.102, 541.104-.111, and 541.115-.116.10 Exempt work shall include, for example, all work that is directly and closely related to exempt work and work which is properly viewed as a means for carrying out exempt functions. The work actually performed by the employee during the

9 If an employee supervises part-time employees, two part-time employees whose hours together equal one full-time employee’s hours are considered to be the equivalent of one full-time employee. 2002 D.L.S.E. Manual § 53.4.1. 10 These cites, and the corresponding references to the F.L.S.A. regulations in the Wage Orders pertaining to the other white collar exemptions, refer to the old federal overtime regulations, not the ones more recently enacted by the Department of Labor.

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course of the work week must, first and foremost, be examined and the amount of time the employee spends on such work, together with the employer’s realistic expectations and the realistic requirements of the job, shall be considered in determining whether the employee satisfies this requirement.

(f) Such an employee must also earn a monthly salary equivalent to no less than two times the state minimum wage for full-time employment. Full-time employment is defined in Labor Code § 515(c) as 40 hours per week.

I.W.C. Wage Order No. 4-2001(1)(A)(1).

The 2001 I.W.C. Wage Orders for the first time specifically incorporated federal regulations under the F.L.S.A. as interpretive guidance for California law. Notably, the Wage Orders do not adopt the F.L.S.A. standards for “primary duty,” which under federal law may include employees who devote less than 50 percent of their time to exempt duties. The Wage Orders also do not adopt the federal law’s salary basis test provisions. See 29 C.F.R. §§ 541.103, .114, .117-.119 (2001). The provisions of the C.F.R. that are specifically referenced by the 2001 Wage Orders contain detailed guidance about the types of duties that typically will be found to be exempt.

b. Administrative Employees

California Wage Order 4-2001 defines a “person employed in an administrative capacity” as any employee:

(a) Whose duties and responsibilities involve either:

(i) The performance of office or non-manual work directly related to management policies or general business operations of his employer or his employer’s customers, or

(ii) The performance of functions in the administration of a school system, or educational establishment or institution, or of a department or subdivision thereof, in work directly related to the academic instruction or training carried on therein; and

(b) Who customarily and regularly exercises discretion and independent judgment; and

(c) Who regularly and directly assists a proprietor, or an employee employed in a bona fide executive or administrative capacity (as such terms are defined for purposes of this section), or

(d) Who performs under only general supervision work along specialized or technical lines requiring special training, experience, or knowledge, or

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(e) Who executes under only general supervision special assignments and tasks, and

(f) Who are primarily engaged in duties that meet the test of the exemption. The activities constituting exempt work and non-exempt work shall be construed in the same manner as such terms are construed in the following regulations under the Fair Labor Standards Act effective as of the date of this order: 29 C.F.R. §§ 541.201-.205, 541.207-.208, 541.210, 541.215. Exempt work shall include, for example, all work that is directly and closely related to exempt work and work which is properly viewed as a means for carrying out exempt functions. The work actually performed by the employee during the course of the work week must, first and foremost, be examined and the amount of time the employee spends on such work, together with the employer’s realistic expectations and the realistic requirements of the job, shall be considered in determining whether the employee satisfies this requirement.

(g) Such employee must also earn a monthly salary equivalent to no less than two times the state minimum wage for full-time employment. Full-time employment is defined in Labor Code § 515(c) as 40 hours per week.


The D.L.S.E. has indicated that it considers the following three types of administrative employees exempt if, and only if, they meet the requirements discussed above:

1. Employees who regularly and directly assist a proprietor or exempt executive or administrator. They include those executive assistants and administrative assistants to whom executives or high level administrators have delegated part of their discretionary powers. Generally, such assistants are found in large establishments where the official assisted has duties of such scope and which require so much attention that the work of personal scrutiny, correspondence and interviews must be delegated.

2. Employees who perform, only under general supervision, work along specialized or technical lines requiring special training, experience or knowledge. Such employees are often described as “staff employees,” or functional, rather than department heads. They include employees who act as advisory specialists to the management, or to the employer’s customers. Typical examples are tax experts, insurance experts, sales research experts, wage-rate analysts, foreign exchange consultants, and statisticians. Such experts may or may not be exempt, depending on the extent to which they exercise discretionary powers. Also included would be persons in charge of a functional department, which may even be a one-person department, such as

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credit managers, purchasing agents, buyers, personnel directors, safety directors, and labor relations directors.

3. Employees who perform special assignments under only general supervision. Often, such employees perform their work away from the employer’s place of business. Typical titles of such persons are lease buyers, field representatives, and location managers for motion picture companies. This category also includes employees whose special assignments are performed entirely or mostly on the employer’s premises, such as customers’ brokers in stock exchange firms and so-called “account executives” in advertising firms.

2002 D.L.S.E. Manual § 52.3 (citations omitted).

As a precursor to the California Supreme Court’s clarification of what constitutes “administrative” work, a California court of appeal issued a series of rulings in the early 2000’s involving the exempt status of claims adjusters employed by Farmers Insurance. In Bell v. Farmers Insurance Exchange, 87 Cal. App. 4th 805, 105 Cal. Rptr. 2d 59 (2001), cert. denied, 534 U.S. 1041 (2001), the court issued a ruling that restricted the availability of exempt “administrative” status under federal and state wage and hour law. Bell accepted plaintiffs’ argument that, under federal law, the regulations that implement the F.L.S.A. draw a distinction between “administrative” and “production” work. “Administrative” work encompasses tasks related to the “servicing” of a business, such as planning, negotiating, purchasing, marketing and business research. “Production” work, plaintiffs contended, encompasses tasks related to the manufacture of the employer’s goods or the performance of the employer’s core services. Until Bell, no California state appellate court had comprehensively addressed the administration/production dichotomy or whether it applies to California’s wage and hour law. In Bell, the First Appellate District held that it does. The court, stating it was following the federal cases, held that claims adjusters for Farmers Insurance Exchange (“FIE”) “produced” the company’s primary product - defined by the court as “the handling of insurance claims” - and were not exempt administrative employees. According to the court, the sole and exclusive business of the FIE is handling insurance claims. The other affiliated entities handle sales and “activities that would normally be included within the executive and administrative functions of a corporation.” Plaintiffs were a class of current and former claims adjusters who worked within FIE’s network of branch offices. The adjusters were responsible for settling claims for FIE, determining liability, recommending coverage, estimating damage, detecting fraud and various other duties associated with claims adjusting.

After extensive analysis, the court concluded that federal authorities may serve as an aid to determining whether an employee is an exempt administrative employee under state law. Looking to those federal authorities, the court identified three distinct sets of criteria for determining exempt “administrative” status: (1) the role of the employee within the organization; (2) the job duties of the employee; and (3) the employee’s level of remuneration. Within the first criterion - the employee’s role within the organization - the court held that federal cases had focused upon the administrative/production dichotomy. The court

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commented, however, that the state wage order applicable to insurance companies - Industrial Welfare Commission Wage Order No. 4 - covered the duties and level of remuneration required for administrative exempt status, but not the employee’s “role.” Accordingly, the court deemed it useful to look to federal law to make this assessment.

The Bell court proceeded to adopt the administrative/ production dichotomy for assessing the “role” of an employee under California’s administrative exemption. The court first defined the “nature” of FIE’s business as “the handling of claims,” stating that the sole function of FIE’s branch offices is “claims adjusting.” Indeed, the court stated that it would not consider the functions performed elsewhere in the FIE organization as it was only concerned with the business function of the branch claims offices in California.

Having defined the nature of the business in this manner, the court concluded that the claims representatives are engaged in settling claims, the day-to-day activities associated with the “production” of claims adjusting. The court rejected FIE’s argument that the plaintiffs’ other duties, including determining liability and recommending coverage, were administrative in nature. The court found that such duties were directly associated with the claims adjusting function. Moreover, the court found it significant that FIE has set the representatives’ authority to settle claims at a low level, and that on matters of “relatively greater importance,” claims representatives were required to turn to supervisors. Accordingly, the court concluded that the claims adjusters did not fall within the “administrative exemption” and were entitled to overtime.

The trial court subsequently entered a judgment for the plaintiffs in excess of $90 million for the unpaid overtime liability, plus prejudgment interest, attorneys’ fees and costs. In Bell v. Farmers Insurance Exchange, 115 Cal. App. 4th 715, 9 Cal. Rptr. 3d 544 (2004) (“Bell II”), the court of appeal affirmed substantially all of the trial court’s award of damages, finding that the trial court did not err in certifying the class (see id. at 746) or in using a random statistical sample and extrapolation for determining the classwide damages. See id. at 751. However, the Bell II court reversed the judgment for the award of unpaid double-time hours worked by the class because the double-time award lacked foundational calculations, an evaluation of the appropriate class size, a margin of error and a sampling methodology for the award. See id. at 756-57. The parties settled the monetary claims for overtime liability, interest, attorneys’ fees and costs for $210 million.

The Bell-type “production” worker analysis, which permits courts to deem an entire group of employees non-exempt without undertaking any analysis of the job duties of individual employees, appears somewhat at odds with the F.L.S.A.’s requirement that exemptions are to be determined on an individualized basis after careful analysis of each employee’s job duties, and indeed that is precisely what the California Supreme Court held in its long-awaited Harris ruling on December 30, 2011. Harris v. Superior Court, 53 Cal. 4th 170 (2011) involved the exempt status of claims adjusters employed by Liberty Mutual Insurance Company. In a 2007 ruling, Harris v. Superior Court, 64 Cal. Rptr. 3d 547 (Aug. 16, 2007), review granted, Nov. 28, 2007, the California Court of Appeal extended the rationale of Bell and found, as a matter of law, that Liberty Mutual’s insurance adjusters were non-exempt

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based solely on its interpretation of the administrative/production worker dichotomy. Moreover, the court of appeal panel majority set a higher bar for what type of work qualifies as “administrative”: “[N]ot all activities that involve advising management, planning, negotiating, and representing the company constitute exempt administrative work. Rather, in order for the listed tasks to fall on the administrative side of the dichotomy, they must be carried on at the level of policy or general operations. . . . Plaintiffs’ planning, negotiating, and presenting are . . . not carried on at the level of policy or general operations. They are all part of the day-to-day business of processing individual claims. They are production work.” Id. at 559-60 (emphasis deleted). In effect, the court of appeal’s ruling exploded the dichotomy and distinguished between three types of work: (1) production work; (2) administrative work; and (3) routine administrative work which qualifies as production work.

The California Supreme Court unanimously found that the court of appeal had misapplied California law. The Court clarified that lower courts may not use the administrative/production worker dichotomy as a dispositive tool for finding employees non-exempt. Instead, they must consider the particular facts before them and apply the language of the statutes and wage orders at issue.

The Supreme Court focused on a single issue: what standard must courts apply to determine whether work is administrative in character and, therefore, within the scope of the administrative exemption. In the process of refining that issue, the Court parsed the first prong of the exemption – which requires that employees engage in work directly related to management policies or general business operations – into two components. The first component, which the Court labeled “qualitative,” addresses whether the work is administrative in nature. The second component, which the Court labeled “quantitative,” addresses whether the work is of substantial importance to the management or operations of the business. The Court’s opinion focused exclusively on the qualitative component.

Discussing at length the Bell decisions, the Court devoted considerable attention to the continued viability of the administrative/production dichotomy, concluding that it can never be used as a dispositive test, and that the lower court erred in treating it as such:

The majority below provided its own gloss to the administrative/production worker dichotomy and used it, rather than applying the language of the relevant wage order and regulations. Such an approach fails to recognize that the dichotomy is a judicially created creature of the common law which has been effectively superseded in this context by the more specific and detailed statutory and regulatory enactments.

53 Cal. 4th at 188. Moreover, the Court emphasized that the dichotomy is ill-suited for the modern workplace:

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“[B]ecause the dichotomy suggests a distinction between the administration of a business on the one hand, and the ‘production’ end on the other, courts often strain to fit the operations of modern-day post-industrial service-oriented businesses into the analytical framework formulated in the industrial climate of the late 1940’s.” Id. at 189 (citing Vogel, J., dissenting, 64 Cal. Rptr. 3d at 570). Accordingly, courts should use the dichotomy only as an analytical tool of last resort, when the statute and wage orders fail to provide guidance:

The essence of our holding is that, in resolving whether work qualifies as administrative, courts must consider the particular facts before them and apply the language of the statutes and wage orders at issue. Only if those sources fail to provide adequate guidance, as was the case in Bell II, is it appropriate to reach out to other sources.

53 Cal. 4th at 190.

The Supreme Court paid special attention to the question whether the court of appeal had properly concluded that “only work performed at the level of policy or general operations can qualify as directly related to management policies or general business operations,” id. at 187 (quotation marks and emphasis deleted), holding that it had not. The Supreme Court emphasized that courts must be attentive to all of the D.O.L. regulations that have been incorporated into the California Wage Orders, not just certain portions of those incorporated regulations. According to the Court, the court of appeal had focused on former Section 541.205(a), without adequately considering former Section 541.205(b) , which states:

The administrative operations of the business include the work performed by so-called white-collar employees engaged in “servicing” a business as, for example, advising the management, planning, negotiating, representing the company, purchasing, promoting sales, and business research and control. An employee performing such work is engaged in activities relating to the administrative operations of the business notwithstanding that he is employed as an administrative assistant to an executive in the production department of the business.

Former Fed. Regs. at 29 C.F.R.§ 541.205(b) (2000). Thus, according to the Court, the activities identified in Section 205(b) are administrative in nature, whether they are performed at the level of policy or not.

In reaching this conclusion, the Court identified as “in doubt,” id. at 189, the persuasiveness of the Ninth Circuit’s contrary interpretation of the F.L.S.A. in Bratt v. County of Los Angeles, 912 F.2d 1066 (9th Cir. 1990). There, the Ninth Circuit held that “‘advising the management’ as used in [section 205(b)] is directed at advice on matters that involve

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policy determinations, i.e., how a business should be run or run more efficiently, not merely providing information in the course of the customer’s daily business operation.” Id. at 1070. Moreover, by questioning Bratt, the Court implicitly drew into question the subsequent Ninth Circuit decision in Bothell v. Phase Metrics, Inc., 299 F.3d 1120 (9th Cir. 2002). There, the Ninth Circuit relied on Bratt for the proposition that the employer must show that an employee is engaged in “‘running the business itself or determining its overall course or policies,’ not just in the day-to-day carrying out of the business’ affairs.” 299 F.3d at 1125. The Supreme Court’s decision in Harris clearly rejects this analysis. (See the discussion of Bothell above in the section addressing F.L.S.A. cases interpreting the administrative exemption.)

On remand, the appellate court again held that the claims adjusters were non-exempt because they did not exercise decisionmaking authority at the policy level, ignoring the Supreme Court’s contrary holding. Harris v. Superior Court, 207 Cal. App. 4th 1225 (July 23, 2012). The Supreme Court ordered the appellate court’s decision depublished on October 24, 2012.

An earlier court of appeal ruling involving a computer worker, Combs v. Skyriver Communications, Inc., 159 Cal. App. 4th 1242, 1259 (2008), followed an approach similar to the one ultimately determined to be correct by the Supreme Court in Harris. In Combs, the Fourth Appellate District rejected plaintiff’s argument that the “[lower] court’s ‘most fundamental error’ was its failure to apply ‘binding [legal] precedent’ establishing that the Bell II dichotomy is a ‘generally accepted framework for analysis.’” The court distinguished the Bell cases on several grounds. When Bell was decided, the former I.W.C. Wage Order No. 4 “lacked any reference to applicable federal regulations, and also lacked the detailed definition of the administrative exemption now found in I.W.C. Wage Order No. 4-2001.” Id. at 1260. The new I.W.C. Wage Order No. 4-2001 “expressly incorporates applicable federal regulations and sets forth a set of specific elements that, if proved, will establish that an employee is ‘a person employed in an administrative capacity.’” Id. Thus, the trial court “acted well within its discretion when it declined to apply the Bell II administrative/production worker dichotomy.” Id. at 1261. Furthermore, “substantial evidence support[ed] the court’s decision to not apply the Bell II dichotomy” because, among other things, the plaintiff performed “specialized functions” that were “unlike the ‘routine and unimportant functions’” performed in Bell. Id. Furthermore, the employer’s organization was “flat,” and the employee’s “job responsibilities called for ‘finer distinctions’ than the [Bell II] administrative/production worker dichotomy provides.” Id. (alteration in original).

In an unpublished Ninth Circuit decision, Heffelfinger v. Electronic Data Systems Corp., Nos. 08-56319, 08-56384, 2012 U.S. App. LEXIS 11508 (9th Cir. June 7, 2012), the court analyzed whether IT workers’ roles were qualitatively and quantitatively administrative. The court affirmed summary judgment for the employer as to two plaintiffs. Their main roles of installing, maintaining, and managing a personnel records management database for the Department of Defense (“DOD”) qualified as “servicing a business,” and were therefore qualitatively administrative. Id. at *3, *5. Their duties, which included executing or carrying

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out DOD database policies by developing and enforcing standards and procedures, affecting policy by monitoring database performance statistics and recommending improvements, and providing solutions to technical issues, demonstrated the majority of their work was quantitatively administrative as well. Id. at *3-4, *6. In contrast, there was a triable issue as to whether a third plaintiff was primarily engaged in qualitatively administrative work. The court noted that the specific kinds of duties enumerated in computer software exemption did not automatically constitute “qualitatively” administrative work within the meaning of the administrative exemption. Id. at *7. Plaintiff asserted he spent less than fifty percent of his time assigning and coordinating work, and instead was primarily engaged in the design, development, and testing of computer systems or programs, and therefore did not qualify for the administrative exemption. Id. at 7-8. The court reversed the district court’s grant of summary judgment to the employer as to the last plaintiff. Id. at *2.

c. Professional Employees

Under California Wage Order 4-2001, a “person employed in a professional capacity” means any employee:

(a) Who is licensed or certified by the State of California and is primarily engaged in the practice of one of the following recognized professions: law, medicine, dentistry, optometry, architecture, engineering, teaching, or accounting; or

(b) Who is primarily engaged in an occupation commonly recognized as a learned or artistic profession. For the purposes of this subsection, “learned or artistic profession” means an employee who is primarily engaged in the performance of:

(i) Work requiring knowledge of an advanced type in a field of science or learning customarily acquired by a prolonged course of specialized intellectual instruction and study, as distinguished from a general academic education and from an apprenticeship, and from training in the performance of routine mental, manual, or physical processes, or work that is an essential part of or necessarily incident to any of the above work; or

(ii) Work that is original and creative in character in a recognized field of artistic endeavor (as opposed to work which can be produced by a person endowed with general manual or intellectual ability and training), and the result of which depends primarily on the invention, imagination, or talent of the employee or work that is an essential part of or necessarily incident to any of the above work; and

(iii) Whose work is predominantly intellectual and varied in character (as opposed to routine mental, manual, mechanical, or physical work) and is of such character that the output produced or the result

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accomplished cannot be standardized in relation to a given period of time.

(c) Who customarily and regularly exercises discretion and independent judgment in the performance of duties set forth in paragraphs (a) and (b).

(d) Who earns a monthly salary equivalent to no less than two times the state minimum wage for full-time employment. Full-time employment is defined in Labor Code § 515(c) as 40 hours per week.


As an exception to the salary requirement, the Legislature added Labor Code section 515.6 in 2001, specifying that the overtime payment provisions of Labor Code section 510 do not apply to licensed physicians or surgeons who earn $55 per hour or more. Id. Effective January 1, 2009, the California Division of Labor Statistics and Research (D.L.S.R.) increased the rate to $69.13 per hour based on changes to the consumer price index. Effective January 1, 2012, the D.L.S.R. increased the rate to $70.86. However, this exemption for licensed physicians and surgeons does not apply to employees in a medical internship or resident program, or to physicians covered by a collective bargaining agreement. Cal. Lab. Code § 515.6(b).

The Legislature and Industrial Welfare Commission also have determined that registered nurses who are “engaged in the practice of nursing” are not eligible for exemption under the learned professional exemption unless they fall within one of three “advanced practice” exceptions for certified nurse midwives, certified nurse anesthetists, and certified nurse practitioners and are primarily engaged in performing duties for which their respective certifications are required. Lab. Code § 515(f); IWC Wage Order 5-2001 § 1(B)(3)(f).

As discussed, supra, the 2001 I.W.C. Wage Orders specifically reference federal law. Subsection b of the professional exemption under the 2001 Wage Orders, quoted above, “is intended to be construed in accordance with” certain provisions of the Code of Federal Regulations. I.W.C. Wage Order 4-2001(1)(A)(3)(e). Like the executive and administrative exemptions, provisions regarding “primary duty” and the salary basis test under the professional exemption of the F.L.S.A. are not incorporated by reference into the Wage Orders. Furthermore, rather than adopt the federal regulation regarding “discretion and judgment” for professional employees, the Wage Orders adopt the “discretion and independent judgment” section of the Code of Federal Regulations under the administrative exemption, and extend it to the professional exemption. Id. (citing 29 C.F.R. § 541.207, not citing 29 C.F.R. § 541.305). Finally, the Wage Orders do not reference certain provisions of the Code of Federal Regulation’s explanation of “learned professions.” Id. (citing only subsections (a) - (d) of 29 C.F.R. § 541.301). The provisions omitted include the federal regulations’ listing of professions which “generally speaking” meet the exemption and other details about particular professions such as accountants and teachers.

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A California appeals court found that 66 instructors at a culinary school were properly classified as exempt professionals. In California School of Culinary Arts v. Lujan, 112 Cal. App. 4th 16, 4 Cal. Rptr. 3d 785 (2003), the court found that the school’s instructors were engaged in the “profession of teaching . . . in an accredited college or university” within the meaning of Wage Order 4, rejecting the D.L.S.E.’s argument that the school does not meet generally accepted notions or dictionary definitions of a “college or university.” According to the court, a school need not offer a four-year course of study leading to a bachelor’s degree to constitute a “college” within the meaning of the Wage Order, nor is it required to use the term “college” in its name.

Two decisions have addressed the status of unlicensed professionals. In Campbell v. PricewaterhouseCoopers, LLP, 642 F. 3d 820 (9th Cir. 2011), the Ninth Circuit, applying California law, ruled that junior accountants who had yet to be licensed in California may be exempt under the learned professional exemption. The court rejected the plaintiffs’ argument that for persons working in the eight “enumerated professions” in subsection (a) of the wage order’s professional exemption criteria (law, medicine, dentistry, optometry, architecture, engineering, teaching, or accounting), the only means of gaining exempt status is through licensure by the State; the alternative “learned professional” criteria set forth in subsection (b) of the wage order are inapplicable. The court concluded there was nothing in the text or structure of the wage order indicating that the enumerated professions in subsection (a) cannot in some instances also be either learned or artistic professions under subsection (b). According to the court, a contrary rule would create “significantly troubling results,” requiring California employers to pay overtime to, for example, recent medical-school graduates working as residents at a hospital; first-year associates at law firms who have taken the California bar exam but not yet received their results; a law clerk on the Supreme Court who is waiting until after her clerkship to take the bar exam; and a senior associate at a New York law firm who temporarily relocates to the firm’s California office to handle a trial pro hac vice. Id. at 829. This, the court said, “cannot be the law.” Id. at 828.

In Zelasko-Barrett v. Brayton-Purcell, LLP, 198 Cal. App. 4th 582, 131 Cal. Rptr. 3d 114 (Aug. 17, 2011), a California court of appeal for the First Appellate District addressed a case involving unlicensed lawyers, one of the hypothetical scenarios that had troubled the Ninth Circuit in Campbell. The plaintiff claimed he was misclassified as exempt while working at the law firm as a “Law Clerk II,” following his law school graduation but before he had obtained his bar license. The First Appellate District affirmed summary judgment for the law firm, adopting the same rationale articulated by the Ninth Circuit in Campbell. The court found ample evidence that the plaintiff qualified as a learned professional under the criteria of subsection (b) of the wage order, based on his role in drafting pleadings; conducting legal research; interacting with opposing counsel, clients, and witnesses; supervising clerical staff; propounding and managing discovery; and performing other similar functions.

3. Developments in Overtime Misclassification Litigation

The Bell v. Farmers litigation in the early 2000’s precipitated - or at least foreshadowed - an avalanche of wage and hour class action suits in California. While some of these suits

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have focused on the production/administration distinction highlighted in Bell, many of them raise different issues (including both misclassification in regard to other exemptions and off-the-clock claims). While plaintiffs have persuaded certain trial court judges to certify these claims on a class basis, an appellate decision gave hope to employers opposing class certification. In Sav-On Drug Stores, Inc. v. Superior Court, 97 Cal. App. 4th 1070, 118 Cal. Rptr. 2d 792 (2002), the Second Appellate District reversed the trial court’s grant of summary judgment, finding that the existence of common policies and procedures does not justify certification where the actual tasks performed by putative class members vary significantly. However, in July 2002, the California Supreme Court granted review and depublished the decision, and in August 2004, the Supreme Court reversed the court of appeal’s denial of class certification, 34 Cal. 4th 319, 17 Cal. Rptr. 3d 906 (2004). The court issued a decision that seemingly has made it considerably easier for plaintiffs to obtain class certification in wage and hour litigation in California.

The court rejected Sav-On’s argument that, because the mix of job duties varied from one class member to another and from one store to another, this rendered the classification question unsuitable for class treatment. The court found that there was substantial common evidence, consistent with the plaintiffs’ theory of violation, that Sav-On had a “deliberate” policy and practice of misclassifying the putative class members. According to the court, this was evidenced by Sav-On’s use of standardized job descriptions and operational policies, its across-the-board decision to reclassify all assistant store managers and operating managers as non-exempt without exception, and its later decision to reclassify all of them as non-exempt without changing their duties or job descriptions. The court found that all of the class members performed similar sets of duties, although the percentage of time devoted to each duty varied somewhat from one person to another. It noted, however, that to the extent the parties disputed the characterization of certain tasks as exempt or non-exempt tasks, this is a mixed fact-law issue that a trial court can easily resolve on a class-wide basis. “Accordingly, neither variation in the mix of actual work activities undertaken during the class period by individual AM’s and OM’s, nor differences in the total unpaid overtime compensation owed each class member, bars class certification as a matter of law.” 34 Cal. 4th at 335. The court concluded, therefore, that the trial court did not abuse its discretion in granting class certification.

The trend of the court rulings in California overtime misclassification cases, in spite of Sav-On, has been moving in the direction of denying class certification, or decertifying classes that previously were certified. The courts increasingly have found the named plaintiffs unable to establish class-wide misclassification by any available means of common proof in the face of evidence that the putative class members’ duties vary from person to person. The courts also have come to the realization in many cases that a class-wide trial would be unmanageable and could lead to serious due process issues for the defendant company.

An example of this trend is the First Appellate District’s decision in Duran v. U.S. Bank National Association, 203 Cal. App. 4th 212 (Feb. 6, 2012), review granted and opin. superseded, __Cal Rptr. 3d. __, 2012 WL 1860854 (May 16, 2012). There, the plaintiffs were

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employed as business banking officers (BBO’s) for U.S. Bank. Their job was to develop and manage small business banking customer relationships through prospecting, networking, cross-selling and relationship management. U.S. Bank classified its BBO’s as exempt under the outside sales exemption, asserting that each of them was expected to devote over 50% of his or her time away from the Bank’s premises engaged in sales activity. Plaintiffs filed suit in 2001, seeking to represent a putative class of 260 current and former BBO’s on claims for unpaid overtime and other wage-and-hour violations under California law.

In 2005 Plaintiffs filed a motion for class certification, and U.S. Bank filed a motion to deny class certification. Plaintiffs’ motion was supported by declarations from 34 current and former BBO’s who asserted that they spent less than half their work time engaged in sales-related activities outside of their branch offices. The Company’s cross-motion was supported by 75 declarations of putative class members who stated that they regularly spent more than half their time engaged in sales activities outside the branch offices. The trial court granted plaintiffs’ motion for class certification and denied the Company’s motion to deny certification.

Ultimately, the case went to a bench trial on a class-wide basis. Prior to the trial, the court ruled that representative testimony would be taken from only 20 of the putative class members, whose names were drawn at random from a hat. Throughout the trial, the court adhered to its evidentiary ruling and precluded U.S. Bank from presenting any testimony about the exempt status of the other 240 class members. In general, the testimony of the 20 randomly-selected class members was to the effect that they generally spent less than one-half of their work time away from the Bank’s branch offices. However, the court previously had allowed four of the randomly-selected employees, who apparently believed they were properly classified as exempt, to opt out of the case, and thus the court excluded their testimony from the trial.

At the conclusion of the trial, the court ruled in favor of the plaintiffs that the Company had misclassified all of its BBO’s as exempt from overtime. At a subsequent trial on damages, the court permitted plaintiffs’ experts to provide an estimate of the number of overtime hours all of the class members had worked, by extrapolating the estimates provided by the 20 selected workers and applying their estimates to the whole class. The court then awarded the plaintiffs and the 260 class members $15 million in damages, plus recovery of their attorneys’ fees and costs. In making this award, the trial court disregarded the 75 declarations of those who asserted that they met the criteria for exempt status because they spent more than 50% of their work time engaged in sales activities away from the branch offices.

On appeal, the First Appellate District found that the trial judge’s trial plan was “fatally flawed” and a “miscarriage of justice.” According to the court, the trial plan deprived U.S. Bank of its constitutional due process rights, in that the plan prevented it from defending against the individual claims of over 90 percent of the class. The court found that the trial plan erroneously relied on representative sampling derived from a 20-person sample

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to determine class-wide liability, which violated principles of due process and resulted in a statistically invalid result.

Fundamental due process issues are implicated not only by the unprecedented and inconsistent use of statistical procedures in the liability and damages phases, but also by the manner in which USB was hobbled in its ability to prove its affirmative defense. Under the court’s plan, as reinforced by its rulings on motions in limine and related evidentiary matters, USB was barred from introducing manifestly relevant evidence. This evidence potentially could have greatly mitigated the damages awarded and possibly could have defeated plaintiffs’ class action claim entirely.

Id. at 254 (footnote omitted). The court cited numerous prior decisions holding that individualized inquiries are necessary where the applicability of an overtime exemption turns on the specific duties performed by each employee, even where the employer has made a common decision to classify all of the employees as exempt.

The court cited with approval Judge Patel’s decision in In re Wells Fargo Home Mortg. Overtime Pay Litigation, 268 F.R.D. 604, 612 (N.D. Cal. 2010), observing:

Plaintiff has not identified a single case in which a court certified an overbroad class that included both injured and uninjured parties. . . . In fact, the court has been unable to locate any case in which a court permitted a plaintiff to establish the nonexempt status of class members, especially with respect to the outside sales exemption, through statistical evidence or representative testimony[.]

Id. at 257 (emphasis deleted). The court also cited the U.S. Supreme Court’s decision in Wal-Mart Stores, Inc. v. Dukes, 564 U.S. __, 131 S. Ct. 2541, 2561 (2011), rejecting a “[t]rial by [f]ormula” approach in class action litigation. Id. at 259.

Responding to plaintiffs’ argument that a trial on the exempt status of 260 class members could take hundreds of days to complete, the court stated: “[W]e have never advocated that the expediency afforded by class action litigation should take precedence over a defendant’s right to substantive and procedural due process.” Id. at 263.

Finally, the appellate court also concluded that the trial court had abused its discretion in certifying the class, and it ordered the class to be decertified.

At this juncture, we need not speculate as to whether a workable trial plan could have been devised to account for these individual inquiries. In view of the many courts that

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have considered this problem at the classification stage, it is doubtful that such a plan could be successfully implemented. Here, the trial court attempted to manage the individual issues in the first phase of this trial by resorting to an unproven statistical sampling methodology that denied USB the right to properly defend the claims against it. As we have demonstrated, the plan fell short. Accordingly, we conclude the failure to grant USB’s second motion to decertify was an abuse of discretion.

Id. at 275. The California Supreme Court accepted the Duran case for review in May 2012. The Supreme Court’s decision in this case is certain to be an extremely important ruling on the circumstances under which wage-and-hour class suits can be certified and tried as class actions.

II. THE COMPUTER-RELATED PROFESSIONALS EXEMPTION

A. Federal Law

Since October 1992, the federal regulations have included special rules that may qualify certain high-level computer programmers and systems analysts as exempt from overtime compensation. 29 C.F.R. § 541.303(b) (2001). These rules since have been codified in section 13 of the F.L.S.A. See 29 U.S.C. § 213(a)(17) (2001). The exemption requires one or more of the following duties:

(1) The application of systems analysis techniques and procedures, including consulting with users, to determine hardware, software, or system functional specifications;

(2) The design, development, documentation, analysis, creation, testing, or modification of computer systems or programs, including prototypes, based on and related to user or system design specifications;

(3) The design, documentation, testing, creation, or modification of computer programs related to machine operating systems; or

(4) A combination of the aforementioned duties, the performance of which requires the same level of skills.

29 C.F.R. § 541.303 (2001).

The D.O.L. overtime regulations confirm these duties criteria with no substantive change. 29 C.F.R. § 541.400.

An employee may either be salaried or hourly paid to qualify as an exempt computer professional under the F.L.S.A. In the case of an hourly employee, the employee must be

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compensated at a rate of at least $27.63 per hour. 29 U.S.C. § 213(a)(17). In the case of a salaried employee, the employee must earn a salary of at least $455 per week, as provided in the D.O.L. regulations. 29 C.F.R. § 541.600. No particular license, certification, or academic degree is required for this exemption, but it is unavailable to trainees or employees in entry-level positions. Id. § 510.705. The exemption does not apply to employees who operate computers, employees who manufacture, repair, or maintain computer hardware or related equipment, or employees whose work is highly dependent on, or facilitated by, the use of computers but who are not engaged in computer systems analysis and programming occupations. Id. § 541.401.

B. California Law

The California Labor Code exempts certain computer software professionals from overtime requirements, provided that they meet certain remuneration requirements and perform specified duties. Cal. Lab. Code § 515.5. The list of qualifying duties makes it clear that the exemption is intended to cover high-level systems design and analyst employees, not systems maintenance or operating employees. Specifically, with regard to the duties test, Section 515.5 provides that an employee in the computer software field shall be exempt if all of the following apply:

(1) The employee is primarily engaged in work that is intellectual or creative and requires the exercise of discretion and independent judgment.

(2) The employee is primarily engaged in duties that consist of one or more of the following:

The application of systems analysis techniques and procedures, including consulting with users, to determine hardware, software, or system functional specifications.

The design, development, documentation, analysis, creation, testing, or modification of computer systems or programs, including prototypes, based on and related to user or system design specifications.

The documentation, testing, creation, or modification of computer programs related to the design of software or hardware for computer operating systems.

(3) The employee is highly skilled and is proficient in the theoretical and practical application of highly specialized information to computer systems analysis, programming, or software engineering. A job title shall not be determinative of the applicability of this exemption.

Cal. Lab. Code § 515.5(a)(1)-(3).

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The California computer software exemption does not apply to an employee if any of the following apply:

(i) The employee is a trainee or employee in an entry-level position who is learning to become proficient in the theoretical and practical application of highly specialized information to computer systems analysis, programming, and software engineering.

(ii) The employee is in a computer-related occupation but has not attained the level of skill and expertise necessary to work independently and without close supervision.

(iii) The employee is engaged in the operation of computers or in the manufacture, repair, or maintenance of computer hardware and related equipment.

(iv) The employee is an engineer, drafter, machinist, or other professional whose work is highly dependent upon or facilitated by the use of computers and computer software programs and who is skilled in computer-aided design software, including CAD/CAM, but who is not in a computer systems analysis or programming occupation.

(v) The employee is a writer engaged in writing material, including box labels, product descriptions, documentation, promotional material, setup and installation instructions, and other similar written information, either for print or for on screen media or who writes or provides content material intended to be read by customers, subscribers, or visitors to computer-related media such as the World Wide Web or CD-ROMs.

(vi) The employee is engaged in any of the specified activities for the purpose of creating imagery for effects used in the motion picture, television, or theatrical industry.

Cal. Lab. Code § 515.5(b).

Before 2006, the computer professional exemption under Labor Code section 515.5 was available only to employees who were paid on an hourly basis and not to those who are salaried. Effective January 1, 2006, the California Legislature amended Section 515.5 to permit employers to pay computer professionals either by salary or by the hour, so long as, in the case of salaried employees, they receive the “annualized full-time salary equivalent” of the then-applicable hourly rate for every hour worked. Thus, for example, in 2007, an employer could pay computer professionals either $49.77 per hour for every hour worked or a salary of at least $103,521 for the first 40 hours worked in a week, plus $49.77 per hour for every hour worked beyond 40 in a week. Compliance with this annualized-salary

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requirement effectively meant that employers still needed to track all hours worked by the persons it classified as exempt under the computer professional exemption.

Beginning in 2008, as a result of subsequent amendments to Section 515.5, the remuneration rules were considerably relaxed. For the period from January 1 to September 30, 2008, exempt computer professionals could be paid $36 per hour for every hour worked or an annualized salary of $74,880 covering the first 40 hours of work per week, plus $36 per hour for all hours beyond 40 in a week. Effective September 30, 2008, employers were permitted to pay exempt computer professionals a straight salary, regardless of the number or hours worked, in lieu of paying them by the hour. For the period from September 30 to December 31, 2008, employers could pay a salary of $75,000 per year, covering all hours worked, or $36 per hour. In 2009, the minimum salary was increased to $79,050, and the minimum hourly rate for employees paid by the hour was increased to $37.94. However, these are indexed rates that are subject to adjustment from year to year, as determined by the California Division of Labor Statistics and Research (D.L.S.R.), based on changes to the California Consumer Price Index. Effective January 1, 2012, the D.L.S.R. increased the minimum salary for computer professionals from $79,050 to $81,026.25, and the minimum hourly rate from $37.94 to $38.89.

III. THE OUTSIDE SALESPERSONS EXEMPTION

A. Federal Law

Under the D.O.L. regulations, an outside salesperson is an employee:

(1) Whose primary duty is:

(i) Making sales within the meaning of section 3(k) of the Act, or

(ii) Obtaining orders or contracts for services or for the use of facilities for which a consideration will be paid by the client or customer; and

(2) Who is customarily and regularly engaged away from the employer’s place or places of business in performing such primary duty.

29 C.F.R. § 541.500.

The current regulations have removed the former requirement that, to be exempt, the employee’s hours spent doing other work not exceed 20 percent of the hours worked in the workweek by nonexempt employees of the employers. See former 29 C.F.R. § 541.507. Work that is performed incidental to and in conjunction with the employee’s own outside sales or solicitations, including incidental deliveries and collections, are not regarded as nonexempt work for this purpose. 29 C.F.R. § 541.500(b).

Special considerations apply to drivers who deliver the employer’s products and also perform functions concerned with the selling of these products. If it appears that the

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drivers’ primary duty is to engage in selling activity, the exemption for outside salespersons may apply. 29 C.F.R. § 541.504. The regulations also contain detailed provisions concerning the effect of promotional work on an employee’s status as an outside salesperson. Id. § 541.503.

In Christopher v. SmithKline Beecham Corp., 132 S. Ct. 2156, 2174, 183 L. Ed. 2d 153 (2012), the United States Supreme Court resolved a circuit split over what it means to “sell” within the meaning of the F.L.S.A., holding that SmithKline Beecham Corporation’s (“GSK”) pharmaceutical sales representatives (“PSR”) were “outside sales” employees, and thus properly classified as exempt from the F.L.S.A. overtime-pay requirements.

Pharmaceutical companies such as GSK had long used “detailers” or PSRs to provide information to physicians about the company’s products in order to persuade physicians to write prescriptions for GSK’s drugs. As PSRs, plaintiffs’ primary objective was to obtain a nonbinding commitment from physicians to prescribe drugs in appropriate cases. Their pay included both a base salary and incentive pay based on the performance of their assigned drugs in their assigned sales territories. Id. at 2164. The district court granted summary judgment to GSK, finding the PSRs were outside salespersons and therefore exempt from overtime under the FLSA. Id. On appeal, plaintiffs alleged the district court erred by not deferring to the D.O.L.’s interpretation, which was first announced in an amicus brief filed in In re Novartis Wage & Hour Litigation, 611 F.3d 141 (2d Cir. 2010). The Ninth Circuit affirmed, holding that the D.O.L.’s interpretation was not entitled to controlling deference. Id. at 2165. The Ninth Circuit’s decision conflicted with the Second Circuit’s decision in Novartis, and so the Supreme Court granted certiorari to resolve this split.

The Court first addressed whether the D.O.L.’s interpretation of the regulations was owed Auer deference, which usually calls for deference to an agency’s interpretation of its own ambiguous regulation. In the Second and Ninth Circuits, the D.O.L. had taken the view that a “sale” required a consummated transaction directly involving the employee for whom the exemption is sought. Before the Supreme Court, the D.O.L. changed its reasoning and contended that “‘[a]n employee does not make a “sale” for purposes of the “outside salesman” exemption unless he actually transfers title to the property at issue.’” Id. at 2165-66. The Court found strong reasons for withholding Auer deference in this case. Until the D.O.L. filed its amicus brief in Novartis, the pharmaceutical industry had little reason to think its practice of treating detailers as exempt outside salesmen would violate the F.L.S.A. The D.O.L. had never acted in a way to suggest it was improper to classify detailers as exempt employees, nor did the statute or regulations indicate this was the case. Id. at 2167-68.

Having concluded that Auer deference was not warranted, the court determined that the D.O.L.’s interpretation that a sale demands a transfer of title was unpersuasive and would not be followed. Id. at 2169. The D.O.L. advanced this new interpretation after arguing in the Second and Ninth Circuit that a sale simply requires a “consummated transaction.” The FLSA defines “sale” to include a “consignment for sale,” which does not involve the transfer of title. Id. That the D.O.L.’s sales regulation states that sales “include

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the transfer of title to tangible property” does not mean a sale necessarily includes the transfer of title. Id.

The court looked to the FLSA’s language exempting persons “employed…in the capacity of [an] outside salesman,” and found that the emphasis on the “capacity” of an employee favored a functional, rather than a formal, inquiry that looked at the particular industry in which an employee worked. Id. at 2170. Obtaining a nonbinding commitment from a physician to prescribe a certain drug was the most PSRs could do to ensure the eventual disposition of the product GSK sells. This kind of arrangement, within the confines of the heavily-regulated pharmaceutical industry, was well within the statutory definition of “sale” as “any sale, exchange, contract to sell, consignment for sale, shipment for sale, or other disposition.” Id. at 2172. Furthermore, PSRs had all the external indicia of salesmen: they were hired for their sales experience, trained to obtain the maximum commitment possible from a physician, worked away from the office with minimal supervision, and received incentive compensation. Id. at 2172. Finding PSRs to be exempt outside salesmen was also consistent with the purpose of the FLSA’s exemption, which was based on the idea exempt employees enjoyed salaries well above the minimum wage and performed work that was difficult to standardize and could not be easily spread to other workers. Id. at 2173. The court therefore affirmed the Ninth Circuit’s decision and held that GSK’s PSRs qualified as outside salesmen. Id. at 2174..

B. California Law

The I.W.C. Wage Orders define an outside salesperson as “any person, 18 years of age or over, who customarily and regularly works 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 use of facilities.” See I.W.C. Wage Order No. 4-2001(1)(M). Employees who meet this definition of outside salesperson are exempt from both the overtime and minimum wage requirements. See 2002 D.L.S.E. Manual § 43.3.

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