California Labor Law Compliance:
Wage and Hour Section
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California Vacation Employment Law
Unlimited PTO
FSLA Regular Rate of Pay
Improper Arbitration Agreements
California Travel Time Pay
Tips in California
California Holding Overtime
Improper Overtime Pay
CA Supreme Court Rest and Meal Break
Arbitration and Discrimination
Compensate All Time Worked
Not Required to Reimburse Employees
Compensation for Walk Time
Primary Work Location
Franchisor not Joint Employer
Calculating Overtime with Flat Sum Bonus
Using Production Vendor
Getting Tools during Commute Require Wages
Limiting PAGA
Meal Break Rounding
Hospital Meal Breaks
Ensure Mostly Rounding Up
Rounding Rejected
Healthcare Working Over 12 Hours Meal Waiver
Employees Suing Payroll Processors
Conversion Wage Claims
Payroll Company Not Liable
Bus Optional, Not Control
Combining Meal and Rest Breaks
Meal Break Attorney Fees
Reporting Time
Paid Meal Periods
Co Vehicle & Sufficient Control
Relief of Duties
Pay for Inspections
PAGA Penalties - Court Case
On Call Pay
Workday and Workweek
PAGA Penalties
Labor Contracting
SubContractor Employees' Pay
Janitorial Employees
Benefits at Final Rate of Pay
Overtime Exemptions
Equal Pay Act of 1963
Recruiters Liable for Wages
Workweek Defined
Alternative Workweek
California Vacation Employment Law
CA Vacation Employment Law
Owens v. Macy's, Inc.
SOURCE:
DATE:
Decided: June 29, 2009
| Lisa OWEN, Plaintiff and Appellant, v. MACY'S, INC., Defendant and Respondent. | Court of Appeal, Second District, Division 2, California. No. B207719. |
_________________________
An employer is entitled to adopt a policy specifying “the amount of vacation pay an employee is entitled to be paid as wages,” depending on length of service. (Suastez v. Plastic Dress-Up Co. (1982) 31 Cal.3d 774, 783, 183 Cal.Rptr. 846, 647 P.2d 122 (Suastez ).) The law permits an employer to offer new employees no vacation time: If an express written company policy forewarns new employees that their compensation package does not include paid vacation during their initial employment, then no vacation pay is earned and none is vested. When such a policy is in place, as it is in this appeal, employees cannot claim any right to vested vacation during their initial employment, because they know in advance that they will not earn or vest vacation pay during this period. The trial court correctly determined that plaintiff was not unlawfully denied vacation pay when her employment ended.
FACTS
Appellant Lisa Owen began working as a sales associate at a Robinsons-May department store (Robinsons) in 1990. In August 2005, Robinsons was acquired by respondent Macy's, Inc. In January 2006, employees at the Robinsons in Arcadia where Owen worked were notified that the store would be permanently closed-and their jobs eliminated-by April 2006. Owen filled out a “career interest form” indicating that she was not interested in job placement at a Macy's department store. The Arcadia Robinsons closed on March 18, 2006. After the closure, Owen “was doing stuff” around the store, though there were other people “that didn't do anything and sat around all day.” Owen's employment at Robinsons ended on April 14, 2006. Her separation summary shows that she was not credited with any unused vacation pay, but received $12,469 in severance and other pay, based on her years of service.
In July 2006, Owen filed suit alleging that Robinsons failed to pay her accrued, vested vacation compensation, in violation of the Labor Code. Owen also alleged that Robinsons' conduct was an unlawful business practice, in violation of the Business and Professions Code. In an amended pleading, she added a claim for breach of the implied covenant of good faith and fair dealing. The lawsuit is styled as a class action on behalf of all similarly situated Robinsons employees.
The Robinsons employee handbook provides that “All eligible associates earn and vest in paid vacation after they have completed six months of continuous employment. The vacation year is May 1 through April 30. Vacation is earned in the same vacation year that it accrues and vests.” The handbook specifies that “Associates whose employment terminates for any reason other than retirement will receive all vested but unused vacation.”
Thus, Robinsons imposes a six-month waiting period before new employees begin to earn vacation.2 The employee handbook states that “ Associates who have completed at least six months of continuous service as of May 1 and who have worked at least 1000 hours during the prior vacation year will be eligible for paid vacation․” The amount of vacation time depends on the employee's length of service with Robinsons. Employees who have worked for six months to one year receive a prorated amount of vacation, i.e., several days. Someone who worked at Robinsons for five months then quit to take another job would not earn or vest in vacation time.
The Robinsons handbook states that “Beginning each May 1, you accrue and vest in up to 50% of your annual vacation amount and on August 1, you accrue and vest in up to [the remaining] 50% of your annual vacation amount.” According to a former Robinsons executive, this last provision means that employees' annual vacation vested before it was actually earned. The executive testified that in some companies, employees earn vacation as each month passes. At Robinsons, the company assumed that the employee would remain employed the entire year. Proceeding “on good faith,” Robinsons gave the employee an entire year's vacation by August 1, “even though you hadn't worked through that new vacation year yet.” Thus, the entire vacation vests prior to an employee's earning his or her full entitlement. However, employees who leave on or before April 30 of any given year would not receive the first half of their vacation entitlement for the vacation year beginning May 1.
Owen testified that she took all three weeks of the vacation time to which she was entitled during the vacation years running from May 1 to April 30 in 2002-2003; 2003-2004; 2004-2005; and 2005-2006. Inconsistently, her declaration states, “I ․ took none of the vacation time or pay I earned by working between May 1, 2005 and my termination date of April 14, 2006.” Owen claims that she is entitled to four weeks of vacation pay for the vacation period running from May 1, 2006, to April 30, 2007 (i.e., after her job ended).
Owen was asked in a deposition, “And why did you conclude in your mind that you were entitled to four weeks for this May 1, 2006, to April 30, 2007, vacation?” She replied, “I don't know how-I don't know why.” When pressed, she said, “I just felt we were entitled to it,” adding, “Why wouldn't they just keep us for another two weeks to get our vacation pay?” Some Robinsons employees in the corporate office were fortunate enough to remain on the company payroll until May 1, 2006, and received vacation pay for the vacation year starting on May 1, 2006.
Robinsons brought a motion for summary judgment, arguing that Owen's claims fail as a matter of law because she was not denied any accrued vacation benefits, and the company took no action to deprive her of vacation benefits by terminating her employment only two weeks before the 2006-2007 vacation year began, while allowing corporate office employees to remain on the job until May 1. Owen opposed the motion, arguing that Robinsons violated state law by imposing a six-month waiting period on new employees before vacation benefits began, and by requiring her to forfeit vacation pay for 2006-2007, pay which she believes she earned during the preceding year. Finally, she argued that Robinsons deliberately timed her layoff date to prevent her from receiving vacation pay on May 1.
THE TRIAL COURT'S RULING
In its ruling, the trial court acknowledged the parties' polar positions: Robinsons believes that under its policy, vacation vests before it is earned, while Owen believes that vacation vests after it is earned. The court acknowledged that state law prohibits a “use it or lose it” policy with respect to vacation pay: if an employer offers vacation benefits, it is required to pay for all vested vacation upon termination of employment. The court rejected Owen's contention that an employer must offer vacation benefits from the first day of employment because state law does not “dictate[ ] the point at which a company providing vacation benefits must begin to provide them.” The employer “is free to determine when an employee becomes eligible for vacation benefits so long as eligibility and vesting occur simultaneously.” Thus, a “waiting period” for vacation benefits to accrue and vest is permissible. The court granted Robinsons' motion for summary judgment. Judgment was entered in favor of Robinsons. A timely appeal was taken from the judgment.
DISCUSSION
1. Appeal and Review
The judgment for respondent is final and appealable. (Code Civ. Proc., § 437c, subd. (m)(1).) A motion for summary judgment “shall be granted if all the papers submitted show that there is no triable issue as to any material fact and that the moving party is entitled to a judgment as a matter of law.” (Id., subd. (c).) “The purpose of the law of summary judgment is to provide courts with a mechanism to cut through the parties' pleadings in order to determine whether, despite their allegations, trial is in fact necessary to resolve their dispute.” (Aguilar v. Atlantic Richfield Co. (2001) 25 Cal.4th 826, 843, 107 Cal.Rptr.2d 841, 24 P.3d 493.) Review is de novo. (Kahn v. East Side Union High School Dist. (2003) 31 Cal.4th 990, 1003, 4 Cal.Rptr.3d 103, 75 P.3d 30.)
2. Overview of Labor Code Section 227.3
Owen's case is predicated on a violation of Labor Code section 227.3. The statute provides: “Unless otherwise provided by a collective-bargaining agreement, whenever a contract of employment or employer policy provides for paid vacations, and an employee is terminated without having taken off his vested vacation time, all vested vacation shall be paid to him as wages at his final rate in accordance with such contract of employment or employer policy respecting eligibility or time served; provided, however, that an employment contract or employer policy shall not provide for forfeiture of vested vacation time upon termination. The Labor Commissioner or a designated representative, in the resolution of any dispute with regard to vested vacation time, shall apply the principles of equity and fairness.”
On its face, Labor Code section 227.3 does not require that an employer provide its employees with any paid vacation at all, contractually or as a matter of policy, as part of the employee compensation package. Rather, the statute states that “whenever” an employer provides vacation benefits, certain requirements must be met when the employment terminates. The law “does not require that an employer include a paid vacation as a portion of his employee's compensation; however, if he does, he is not free to reclaim it after it has been earned.” (Henry v. Amrol, Inc. (1990) 272 Cal.Rptr. 134, 222 Cal.App.3d Supp. 1, 5.) Plaintiff's counsel conceded that “As I understand the law, Your Honor, there is no requirement of vacation.” Thus, there is no dispute, at the outset, that an employer may offer its employees no vacation time, if the employer so chooses.
The Supreme Court applied Labor Code section 227.3 in Suastez. The Court wrote that paid vacation “is not a gratuity or a gift, but is, in effect, additional wages for services performed,” or a “form of deferred compensation.” (Suastez, supra, 31 Cal.3d at p. 780, 183 Cal.Rptr. 846, 647 P.2d 122.) The Court analogized vacation benefits to pension or retirement benefits. Pension rights vest “upon the acceptance of employment.” (Ibid.) Continuing the analogy, the Court stated that an employee “has earned some vacation rights ‘as soon as he has performed substantial services for his employer.’ ” (Ibid., quoting two pension cases, Miller v. State of California (1977) 18 Cal.3d 808, 815, 135 Cal.Rptr. 386, 557 P.2d 970, and Kern v. City of Long Beach (1947) 29 Cal.2d 848, 855, 179 P.2d 799.) The Court added, “[t]he right to some share of vacation pay vests, like pension rights, on acceptance of employment.” (Suastez, supra, 31 Cal.3d at p. 781, 183 Cal.Rptr. 846, 647 P.2d 122.)
Moving to the language of Labor Code section 227.3, the Court interpreted the statutory mandate that “ ‘all vested vacation time shall be paid [to the employee] as wages at his final rate in accordance with such contract of employment or employer policy respecting eligibility or time served ․’ ” (Suastez, supra, 31 Cal.3d at p. 782, 183 Cal.Rptr. 846, 647 P.2d 122, quoting section 227.3.) The Court explained that the quoted “passage only means that the amount of vacation pay an employee is entitled to be paid as wages is to be determined with reference to the employer's policy. The typical vacation policy provides that the amount of vacation time for which an employee is eligible depends on, among other things, the length of employment with the company and the title or position the employee holds. The Legislature has left the determination of these variables to the employer or the bargaining table. If the Legislature had intended the contract to control the time of vesting, it could easily have drafted the statute to compel such a result. It did not.” (Suastez, at p. 783, 183 Cal.Rptr. 846, 647 P.2d 122.) The primary rule to be extracted from Suastez is that vacation pay vests as it is earned, under Labor Code section 227.3.
3. An Employer May Refuse to Offer Paid Vacation to New Employees
At the heart of Owen's objections is Robinsons' policy declaring that a new employee earns no vacation time during the first six months of employment. Employees who have worked for Robinsons for six months to one year earn and vest in vacation time on a prorated basis. In Owen's view, Suastez requires that an employee be credited with vacation time starting from the very first day of employment. As a result, Owen reasons, Robinsons' initial six-month waiting period-during which an employee earns zero vacation credit-is unlawful.
Owen agrees that under Suastez, the amount of vacation pay that an employee is entitled to be paid as wages is established by company policy. (Suastez, supra, 31 Cal.3d at p. 783, 183 Cal.Rptr. 846, 647 P.2d 122.) In Suastez, the employer's written vacation policy was “1 week-First Year,” followed by “2 weeks-Second Year,” and so on. (Id. at p. 776, fn. 2, 183 Cal.Rptr. 846, 647 P.2d 122.) The implication to be derived from the employer's policy in Suastez is that the employee began earning a fraction of one week's vacation pay from the very first day of work, until a full week of vacation accrued at the end of the employee's first year. Although vacation time was fractionally earned on a daily basis starting from day one in Suastez, none of it vested until the end of the employee's first year, under the employer's policy.
In the situation described in Suastez, “prorated vacation benefits must be paid on termination of employment even in cases where employees do not meet prerequisites of the employer's policy, such as attaining a full year of employment․ After Suastez, certain types of vacation pay policies which were formerly permissible, such as policies allowing the forfeiture of vacation pay before one full year of service or which required employees to ‘use or lose’ vacation pay by a specific date, were prohibited.” (Millan v. Restaurant Enterprises Group, Inc. (1993) 14 Cal.App.4th 477, 481, 18 Cal.Rptr.2d 198.)
The Robinsons vacation policy is distinguishable from the policy described in Suastez. Unlike the policy in Suastez, which unequivocally provided that an employee would earn a one week vacation during the “first year” of employment (i.e., starting on day one of the employment), it is clear from the Robinsons' employee handbook that the amount of vacation time earned during the first six months of employment is zero. After the first six months, the employee earns, accrues and vests in a small amount of vacation time. Thus, Robinsons' policy excludes vacation benefits at first, followed by a small amount of vacation pay earned after the initial six-month period; it is not a “1 week-First Year” policy, as in Suastez.
As stated in Suastez, “the amount of vacation pay an employee is entitled to” is determined by company policy, and that amount depends on “the length of employment with the company and the title or position the employee holds.” (Suastez, supra, 31 Cal.3d at p. 783, 183 Cal.Rptr. 846, 647 P.2d 122.) A company policy specifying that no vacation is earned during the first six months of employment is permissible under Suastez. In this instance, Robinsons' written policy specifies that the employee compensation package does not include vacation time starting from the first day of employment. Any prospective employee reading Robinsons' handbook would understand that he or she will not earn vacation pay as part of the compensation package for the first six months. By making it clear in advance that vacation is not part of a new employee's compensation, Robinsons does not run afoul of the rule that prohibits an employer from reducing an employee's wages for services after the service has been performed.
By way of analogy, the courts have approved employer vacation policies that warn employees, in advance, that they will cease to accrue vacation time accumulated in excess of an announced limit. “[I]f the employment agreement precludes an employee from accruing more vacation time after accumulating a specified amount of unused vacation time (a ‘no additional accrual’ policy), the employee does not forfeit vested vacation pay. A ‘no additional accrual’ policy simply provides for paid vacation as part of the compensation package until a maximum amount of vacation is accrued. The policy, however, does not provide for paid vacation as part of the compensation package while accrued, unused vacation remains at the maximum. Since no more vacation is earned, no more vests. A ‘no additional accrual’ policy, therefore, does not attempt an illegal forfeiture of vested vacation.” (Boothby v. Atlas Mechanical, Inc. (1992) 6 Cal.App.4th 1595, 1602, 8 Cal.Rptr.2d 600. Accord, Henry v. Amrol, Inc., supra, 272 Cal.Rptr. 134, 222 Cal.App.3d Supp. at p. 5: the law does not prevent an employer from “announcing a level beyond which additional vacation time would no longer accrue. This would prevent additional vacation from vesting after a certain level had been reached.” See also Association for Los Angeles Deputy Sheriffs v. County of Los Angeles (2007) 154 Cal.App.4th 1536, 1547, 65 Cal.Rptr.3d 665, in which this Court approved a written contract that was “a species of ‘no further accrual’ ” vacation policy for employees who had earned an excess of vacation time.)
If an employer's written vacation policy may legitimately prevent an employee from earning additional vacation compensation well into the course of the employee's career, when the employee has “maxed out” on unused vacation time-without causing an illegal forfeiture of vested vacation-then the opposite is equally true. The employer's written vacation policy may legitimately prevent a new employee from earning any vacation time at all, just as the policy may deny long-term employees any further vacation time. In effect, these written policies forewarn employees that if they begin a career at these companies, (1) they will not earn any vacation time during the first six months, and they will not vest in or forfeit any vacation compensation if they leave during that initial period, but they will earn and vest in vacation time after six months and (2) if they choose to continue their career at these companies, they will earn vacation up to a certain maximum amount, but if they continue to work after reaching this maximum, they will not be compensated for or vest in additional vacation time.
In short, “No case has held that what will happen or vest in the future has already somehow become vested or accrued in the present. The rule against forfeiture of accrued vacation rights, by its own terms, cannot apply to vacation pay which is to be earned in the future, i.e., which has not yet accrued.” (Kistler v. Redwoods Community College Dist. (1993) 15 Cal.App.4th 1326, 1334, 19 Cal.Rptr.2d 417.) This statement applies equally to new employees who can expect to earn future vacation compensation (after a waiting period) and to established employees who have earned too much unused vacation time and will not earn more in the future. When no vacation is earned, none vests. (Boothby v. Atlas Mechanical, Inc., supra, 6 Cal.App.4th at p. 1602, 8 Cal.Rptr.2d 600.)
4. Owen Did Not Earn Vacation in Advance of the Vacation Year
In Owen's view, she earned her vacation in advance of the “vacation year” beginning on May 1, because Robinsons improperly failed to credit her and other employees with vacation time starting from their very first day on the job. As a result, she reasons, an employee who leaves on April 29 forfeits vacation compensation that was earned during the preceding year. Owen's view is mistaken.
As discussed above, Robinsons' written policy legitimately prohibited new employees from earning any amount of vacation for the first six months. After the first six months, employees earn a small amount of prorated vacation, until May 1 arrived. At that point, a junior associate would accrue 50 percent of a one-week annual vacation, and the other 50 percent would accrue on August 1. The only event that occurred “in advance” was the rate at which vacation accrued. Instead of having to wait for the week-long vacation to slowly accrue while being earned by the employee between May 1 and April 30, the employee could promptly take the entire vacation in August. If the employee quit in September, after taking the full vacation, the employee would take advantage of Robinsons, by using up vacation time that had not yet been earned.
During her deposition, Owen acknowledged that she took all three weeks of the vacation time to which she was entitled between May 1, 2005, and April 30, 2006. She had difficulty expressing why she felt entitled to four weeks of vacation for the vacation year starting May 1, 2006, when her employment ended on April 14, 2006. Finally, she asked, “Why wouldn't they just keep us for another two weeks to get our vacation pay?” In effect, Owen wants to be paid for a vacation year (May 1, 2006-April 30, 2007) during which she did not work for Robinsons or earn any vacation time. Owen was given substantial separation pay. She is not entitled to vacation pay for a year in which she did not work for her employer.
DISPOSITION
The judgment is affirmed. Each side to bear its own costs on appeal.
Unlimited PTO
Unlimited PTO Addressed by CA Court of Appeals
McPherson v. EF Intercultural Foundation, Inc.
SOURCE:
DATE:
April 1, 2020
AGENCY:
COURT OF APPEAL OF THE STATE OF CALIFORNIA , SECOND APPELLATE DISTRICT
DIVISION THREE TERESA McPHERSON et al., Plaintiffs and Respondents, v. EF INTERCULTURAL FOUNDATION, INC., Defendant and Appellant. | B290869 Los Angeles County Super. Ct. No. BC609090 |
APPEAL from a judgment of the Superior Court of Los Angeles County, Michael J. Raphael, Judge. Affirmed in part and reversed in part with directions.
Seyfarth Shaw, Christian Rowley, Candace Bertoldi and Kiran A. Seldon for Defendant and Appellant.
Law Offices of Courtney M. Coates and Courtney M. Coates for Plaintiffs and Respondents. 2
Paul Hastings, Paul W. Cane, Jr., Zachary P. Hutton and Brian A. Featherstun for California Employment Law Council and Employers Group as Amici Curiae on behalf of Defendant and Appellant.
_________________________
INTRODUCTION
When an employer’s policy allows an employee to take an unspecified amount of paid time off without accruing vacation time, does the employee’s right to that paid time off vest so the employer must pay her for unused vacation under Labor Code section 227.31 when her employment ends? Or does section 227.3 apply only to policies providing a fixed amount of vacation that accrues over time? That is the primary issue posed by this appeal by EF Intercultural Foundation, Inc. (EF) from the trial court’s judgment awarding vacation wages to three of EF’s former exempt employees—Teresa McPherson, Donna Heimann, and Linda Brenden.
In the published portion of this opinion, we conclude section 227.3 applies to EF’s purported “unlimited” paid time off policy based on the particular facts of this case. We by no means hold that all unlimited paid time off policies give rise to an obligation to pay “unused” vacation when an employee leaves. Flexible work arrangements and unlimited paid vacation policies may be of considerable benefit to employees and to the employers who want to recruit and retain those employees. Employees and employers are free to contract for unlimited paid vacation, consistent with the Labor Code and governing case law. Here, however, EF never told McPherson and her fellow plaintiffs that they had unlimited paid vacation. EF had no written policy or agreement to that effect, nor did its employee handbook cover these plaintiffs. As it turned out, McPherson, Heimann, and Brenden took less vacation than many of EF’s other managers and exempt employees covered by the employee handbook, whose accrued vacation vested as they worked for EF month after month.
As to Heimann only, we reverse the judgment and remand the case to the trial court to recalculate the amount of vacation wages owed her, excluding vacation wages earned after she moved to Virginia in 2005.2 We affirm the judgment in all other respects, addressing EF’s additional contentions in the unpublished portions of the opinion.
FACTS AND PROCEDURAL BACKGROUND
Consistent with our standard of review, we state the facts established by the record in the light most favorable to the judgment. (Los Angeles Unified School Dist. v. Casasola (2010) 187 Cal.App.4th 189, 194, fn. 1.)
1. The parties EF is a foreign corporation authorized to do business in California. EF Educational Homestay Program (EHP) is a division of EF. EF is a nonprofit that runs educational and cultural exchange programs between the United States and other countries. EHP primarily operates out of EF’s main office in Cambridge, Massachusetts.
EHP employs full-time “area managers” on the east and west coasts to run seasonal homestay programs for international students in their regions. Area managers work from home and in the field. They hire, train, and work with a staff to recruit host families for the students and to operate the programs. Programs mainly run in the summer, but some regions also hold shorter winter programs.
Plaintiffs were full-time, exempt, salaried EF employees who worked in the EHP division.3 Brenden worked as an area manager from 2005 to September 2015. She requested severance when her employment was terminated. She ultimately received three months’ severance and signed a severance agreement that included a general release of claims.
Heimann was an area manager from 1995 to 1998. She became EHP’s west coast manager in charge of transportation and excursions4 in 1998. Although Heimann moved to Virginia in 2005, she continued to work for EHP in that same role until she retired on October 31, 2014. Heimann worked from home
in Virginia, but traveled to California annually as part of her job. She stayed in Southern California from mid-June through August when the summer program was underway, and returned at the start of the year and in spring or fall for trainings and meetings.
Heimann wanted to take time off before she retired. EHP’s then-president Matthew Smith agreed she could take 20 days. When Heimann was able to take only six days of vacation before she retired, Smith agreed to pay her for the 14 remaining days as “vacation pay.”
McPherson worked as an area manager from 2003 to 2004 and again from 2005 to 2014. From late 2014 to fall 2015, McPherson worked in an administrative “program support” position as part of a one-year pilot program (program manager). EHP did not have the budget to extend the program manager position past September 30, 2015, when it was set to expire. McPherson sent EHP a proposal to retain her in a new position for the next season. On September 23, 2015, EHP’s president Robert Hart left McPherson a voicemail that he needed more time to consider the proposal. EHP continued to pay McPherson in October 2015.
On November 6, 2015, Hart told McPherson that EHP had no budget for her proposed position for the 2015-2016 season. Hart then sent her a severance agreement/termination letter on November 19, 2015, stating her employment with EHP had ended as of September 30, 2015.
2. EF’s Vacation Policy
EF has an employee handbook. It covered EHP employees who worked at the main office in Cambridge and “bosses,” such as regional directors, as well as operations managers. The 2014 handbook contains a vacation policy that provides salaried employees with a fixed amount of vacation days per month based on their length of service.5 Employees could carry over 10 accrued, unused vacation days from one year to the next. If an employee carried over more than 10 accrued vacation days, EF paid the employee 70 to 100 percent of the value of those days.6 Once an employee reached the maximum of yearly accruable vacation plus the 10 carryover days, the employee no longer accrued vacation until he or she used a portion of the accrued time. Employees subject to this policy were required to use an online scheduling tool that kept track of their accrued vacation balance to request and obtain approval for vacation.
This accrued vacation policy did not apply to area managers or the west coast manager. Instead, plaintiffs could take time off with pay, but they did not accrue vacation days. Area managers did not use the online system to request time off or to track the number of days they had taken. Instead, they were required to notify their supervisors before taking time off. Taking time off during EHP’s peak season was “strongly discouraged,” but was approved in some circumstances.
3. Plaintiffs’ complaint
On February 3, 2016, plaintiffs sued EF alleging it failed to pay them accrued but unused vacation wages. McPherson also alleged EF failed to pay her regular wages earned in November 2015. The complaint asserts causes of action for (1) violation of Labor Code section 227.3 (denial of vacation wages), (2) breach of implied contract, (3) breach of the implied covenant of good faith and fair dealing, (4) violation of Labor Code sections 201 and 203 (unpaid wages at discharge and waiting time penalties), and (5) violation of Business and Professions Code section 17200 et seq. (unfair competition).
In February 2017, EF moved for summary judgment. Plaintiffs shifted the focus of their legal theory for recovery of accrued vacation wages under section 227.3 from EF’s express vacation policy to EF’s unwritten policy of providing plaintiffs “unlimited” vacation, contending it was a “de facto ‘use it or lose it’ policy.” The court granted summary adjudication on plaintiffs’ claim for breach of the covenant of good faith and fair dealing, but otherwise denied EF’s motion.
4. Bench trial and court’s statements of decision
The case proceeded to a bifurcated bench trial. The liability phase took place in June 2017. After filing posttrial briefs, the parties presented closing arguments on October 20, 2017. On December 11, 2017, after issuing a tentative ruling and considering further submissions from the parties,7 the court issued its statement of decision on the first phase of the trial, finding EF liable for vacation wages. On March 12, 2018, following the second phase of the trial on damages—conducted by documents and oral argument—the court issued its tentative decision, which reconsidered parts of its first statement of decision on liability and addressed plaintiffs’ damages.
a. Plaintiffs’ entitlement to vacation wages under EF’s policy
In its first statement of decision, the trial court termed EF’s policy of providing vacation time that did not accrue as an “undefined” rather than an “unlimited” vacation policy. The court reasoned “[p]laintiffs’ vacation requests here needed to be approved, there is no evidence that more than a typical amount of vacation was requested or approved, and no one told plaintiffs that they had the right to take any large amount of vacation.
It appears to the Court that the parties proceeded on an understanding that the policy was that plaintiffs had the right to take an amount of approved vacation that was within the amounts typical of most jobs at the company—perhaps the amount in the employee handbook—even if there was no precise amount expressly stated or agreed upon.”
The court then concluded “vacation time vests under a policy where vacation time is provided, even if the precise amount is not expressly defined by the employer in statements to employees.” It found “EF had a ‘policy [that] provides for paid vacations’ under section 227.3.” The court reasoned that, “[b]ecause vacation time vests under California law if an employee is told the precise amount she has a right to (e.g., ‘two weeks annually’), it does not make sense that vesting can be avoided if the employee would in fact receive the same amount if she asked for it, but is simply not told that precise amount would be approved. Either way, the employer has a policy of providing at least that much vacation.” The court found “there could be no dispute that plaintiffs would receive (at least) a couple of weeks of paid vacation annually under EF’s policy, and there likewise could not be a serious belief that EF would approve as much as several months[ ] of paid vacation—the plaintiffs would not have dared ask for anything like that. [¶] If a policy of undefined vacation could avoid vesting, an employee could lose compensation that another identically situated employee was given, contrary to California law that vacation is to be treated as a wage.”
The court further reasoned “offering vacation time in an undefined amount simply presents a problem of proof as to what the employer’s policy was. That policy is implied through conduct and the circumstances, rather than through an articulated statement. The Court must determine the amount of vacation time that the employer’s policy actually made available to plaintiffs, if necessary using principles of ‘equity and fairness’ (section 227.3) based on the circumstances.” (Footnote omitted.)9
The court initially found that “EF’s policy was to approve the amount of vacation provided in the employee handbook for plaintiffs, even though EF may not have expressly stated that amount would be approved.” It thus concluded plaintiffs could “recover vacation as proven under the policy in EF’s employee handbook, including the cap on accrual.”
In its second statement of decision, the court reconsidered this conclusion. The court noted “[p]laintiffs testified that, through about forty work-years in total for the three of them, they actually were approved to take between one and twenty vacation days per year.” Based on that testimony, the court concluded that “[s]ince twenty days’ annual vacation was approved at least once, . . . at least that much vacation was actually available to plaintiffs under the EF policy applied to them.”
The court determined application of the employee handbook’s vacation policy to plaintiffs was “not the best course in this case.” It noted the parties’ second-phase arguments “concern[ed] the application of the statute of limitations to the annual ‘payouts’ [of vacation accrued over the carryover limit] under the handbook policy.” The court concluded the application of the statute of limitations “in this situation seems too arbitrary to best serve the purpose of determining what amounts of vacation actually vested,” noting neither EF nor plaintiffs “thought at the time that the handbook actually applied to the plaintiffs.”
The court concluded “the best approach is a more straightforward one: 20 days of vacation vested annually for each plaintiff, and any unused portion is payable at termination. See Church v. Jamison (2006) 143 Cal.App.4th 1568.” The court based its conclusion on law and equity under section 227.3. As a legal determination, the court found the evidence demonstrated 20 days’ annual vacation was available to plaintiffs under EF’s policy. Under principles of equity and fairness, the court stated it was “attempting to provide plaintiffs with adequate compensation for unused vacation time, without over- compensation, in circumstances where the amount of vacation time available was not expressly defined.”
b. Brenden’s release and severance
At trial EF argued Brenden’s claims were barred by the written release of known and unknown claims she signed as a condition of her severance. The court concluded section 206.5, subdivision (a)10 rendered Brenden’s purported release of her vacation wage claims “ ‘null and void’ ” because “there was no vacation-pay dispute that was being settled at the time of the release.” The court acknowledged the statute “has been interpreted as meaning, ‘wages are not “due” if there is a good faith dispute as to whether they are owed.’ ” The court found the case law also supported its interpretation that a release is invalid under section 206.5 if it “pre-emptively waives then-unrecognized claims,” as was the case here.
The court also rejected EF’s contention Brenden’s damages should be reduced by the $11,362.50 severance payment because it was consideration for the release of wage claims the court had found invalid. The court found persuasive Brenden’s argument that the severance amount paid her also to release non-wage claims and thus she need not return it.
c. Heimann’s Virginia residency
EF argued California’s wage and hour laws did not apply to Heimann because she lived in Virginia. The court agreed with EF that California’s wage and hour laws do not cover all work with some connection to California. But it disagreed “that the standard is so high that the employee’s work must be ‘entirely’ in California.” The court had “no doubt” that Heimann was covered by California’s employment laws. It found her work was focused on people and activities in California and required her to reside temporarily in California for significant periods.
d. McPherson’s salary
EF argued McPherson’s employment ended September 30, 2015, when her program manager contract expired. McPherson argued it ended November 19, 2015, when she received her termination letter. The court concluded EF terminated McPherson’s employment on November 6, 2015, the day EF management told her she would not be continuing with the company, and it owed her unpaid wages from November 1 through November 6, 2015. The court found that—had EF intended McPherson’s employment to end on September 30, 2015, even while it considered her proposal for a new position—
“it merely had to either (a) expressly tell her that or (b) make a decision on extending her by September 30, rather than taking until November to do so.” The court also found EF’s payment of McPherson’s salary in October 2015 “an important reason why an objective employee in McPherson’s position would have concluded she was still employed.”11
e. Amount of unused vacation wages owed
EF did not track the number of vacation days plaintiffs used during their employment. Plaintiffs did not use the online tracking system that employees subject to the handbook’s vacation policy used. The court found Heimann “highly credible.” It adopted her testimony on the number of vacation days she took during her employment.
The court found Brenden and McPherson credible, but was “less convince[ed] that their recollection and accounts of their vacation usage should be credited wholesale.” Without recordkeeping, there was no way for the court to determine “with certainty” the amount of vacation each actually took. The court found “eight days’ vacation are to be added to each of the amounts that these two plaintiffs recall that they took each year, to best reflect how much vacation she actually took, based on their testimony.”
The court concluded plaintiffs were not owed waiting time penalties. The court found EF had a reasonable, good faith belief that vacation wages were not owed, as no California authority specifically has addressed “undefined-amount vacation policies.”
The court ordered plaintiffs to prepare a proposed statement of decision calculating the mathematical application of the court’s findings to determine each plaintiff’s damages.
5. Judgment and appeal
On April 17, 2018, the court entered judgment in the total sum of $88,594.65, including prejudgment interest, in favor of plaintiffs. McPherson was awarded $9,780.98 in regular and vacation wages and interest; Heimann was awarded $52,149.10 in vacation wages and interest; and Brenden was awarded $26,664.57 in vacation wages and interest.12 On May 17, 2018, the court awarded plaintiffs $397,742.33 in attorney fees. On June 20, 2018, EF filed a notice of appeal from the April 17 judgment. EF filed a motion with its reply brief asking us to take judicial notice of documents that are part of the legislative history of section 227.3. EF argued the documents are necessary to respond to plaintiffs’ contentions about the meaning of “ ‘accrued’ ” and “ ‘vested’ ” and the statute’s provision about
“ ‘principles of equity and fairness.’ ” Plaintiffs opposed the motion, asserting EF did not introduce the documents in the trial court, the plain language of section 227.3 is unambiguous, and the letters and statements from individual legislators EF submitted are not proper subjects for judicial notice. We deferred our ruling pending consideration of the merits of EF’s appeal. We now grant EF’s motion and take judicial notice of the exhibits attached to its application.
DISCUSSION
EF asks us to reverse the judgment because (1) California law does not prohibit “ ‘unlimited’ or ‘uncapped’ time off policies like EHP’s”; (2) neither EHP’s policy nor the parties’ contracts gave plaintiffs “vested vacation rights”; and (3) the trial court “arbitrarily created vested vacation rights” and “adopt[ed] an incorrect and unworkable legal standard.” EF also asks us to reverse the judgment on the separate grounds (a) as to Brenden that she released her vacation wage claims, (b) as to Heimann that section 227.3 did not apply to her after she moved to Virginia in 2005, and (c) as to McPherson that she is not entitled to unpaid wages from November 2015 because her employment ended September 30, 2015, and she performed no work in November 2015.
1. Standard of Review
On appeal from a judgment based on a statement of decision after a bench trial, we review the trial court’s conclusions of law de novo and its findings of fact for substantial evidence. (Thompson v. Asimos (2016) 6 Cal.App.5th 970, 981.)
Under the deferential substantial evidence standard of review, we “liberally construe[ ]” findings of fact “to support the judgment and we consider the evidence in the light most favorable to the prevailing party, drawing all reasonable inferences in support of the findings.” (Ibid.) “We may not reweigh the evidence and are bound by the trial court’s credibility determinations.” (Estate of Young (2008) 160 Cal.App.4th 62, 76.) Testimony believed by the trial court “may be rejected only when it is inherently improbable or incredible, i.e., ‘ “unbelievable per se,” ’ physically impossible or ‘ “wholly unacceptable to reasonable minds.” ’ ” (Oldham v. Kizer (1991) 235 Cal.App.3d 1046, 1065.) “ ‘The ultimate determination is whether a reasonable trier of fact could have found for the respondent based on the whole record.’ ” (Estate of Young, at p. 76.)
“A judgment or order of a lower court is presumed to be correct on appeal, and all intendments and presumptions are indulged in favor of its correctness.” (In re Marriage of Arceneaux (1990) 51 Cal.3d 1130, 1133.) “Under the doctrine of implied findings, the reviewing court must infer . . . that the trial court impliedly made every factual finding necessary to support its decision.” (Fladeboe v. American Isuzu Motors Inc. (2007) 150 Cal.App.4th 42, 48.) We affirm a judgment if correct on any ground. (Mike Davidov Co. v. Issod (2000) 78 Cal.App.4th 597, 610.)
We review questions of statutory construction de novo. (Kirby v. Immoos Fire Protection, Inc. (2012) 53 Cal.4th 1244, 1251 (Kirby).) “Our primary task when faced with a question of statutory construction is to determine the intent of the Legislature, and we begin by looking to the statutory language. . . . ‘The words of the statute must be construed in context, keeping in mind the statutory purpose.’ ” (McCarther v. Pacific Telesis Group (2010) 48 Cal.4th 104, 110 (McCarther).) “ ‘ “If there is no ambiguity in the language, we presume the Legislature meant what it said and the plain meaning of
the statute governs.” [Citations.] In reading statutes, we are mindful that words are to be given their plain and commonsense meaning. [Citation.] We have also recognized that statutes governing conditions of employment are to be construed broadly in favor of protecting employees.’ ” (Kirby, supra, 53 Cal.4th at p. 1250.)
2. The court did not err when it concluded EF owed plaintiffs vacation wages under section 227.3
EF styles the legal question before us as “whether EHP’s practice of permitting [p]laintiffs to take ‘uncapped’ time off without accruing vacation wages complies with California law.”
It argues that if we conclude this practice is lawful, then EF had no obligation to pay plaintiffs vacation wages at their termination because “nothing ‘vested’ in the first place.” In essence, we must determine if EHP’s policy to provide certain employees unaccrued paid time off is subject to section 227.3. On the particular, unusual facts of this case, we conclude it is.
a. Section 227.3 and the case law interpreting it
No California authority has addressed whether a nonaccrual, unlimited paid time off13 policy is subject to section 227.3. We first describe current California law on paid vacation policies.
California law does not require employers to provide employees with paid vacation. (Owen v. Macy’s, Inc. (2009) 175 Cal.App.4th 462, 468 (Owen).) “[W]henever” an employer does have a policy of providing its employees with paid vacation, however, section 227.3 requires the employer to pay as wages any “vested” vacation time a terminated employee has not used. Section 227.3 provides,
“Unless otherwise provided by a collective- bargaining agreement, whenever a contract of employment or employer policy provides for paid vacations, and an employee is terminated without having taken off his vested vacation time, all vested vacation shall be paid to him as wages at his final rate in accordance with such contract of employment or employer policy respecting eligibility or time served; provided, however, that an employment contract or employer policy shall not provide for forfeiture of vested vacation time upon termination. The Labor Commissioner or a designated representative, in the resolution of any dispute with regard to vested vacation time, shall apply the principles of equity and fairness.”
Our Supreme Court addressed the question of when the right to vacation “ ‘vest[s]’ ” under section 227.3 in Suastez v. Plastic Dress-Up Co. (1982) 31 Cal.3d 774, 776 (Suastez). The Court held, “The right to a paid vacation, when offered in an employer’s policy or contract of employment, constitutes deferred wages for services rendered. Case law from this state and others, as well as principles of equity and justice, compel the conclusion that a proportionate right to a paid vacation ‘vests’ as the labor is rendered. Once vested, the right is protected from forfeiture by section 227.3. On termination of employment, therefore, the statute requires that an employee be paid in wages for a pro rata share of his vacation pay.” (Id. at p. 784.)
There, the company’s policy permitted employees to take one to four weeks of paid vacation annually depending on their length of employment, but employees were not eligible to take vacation until the anniversary of their employment. (Suastez, supra, 31 Cal.3d at p. 776 & fn. 2.) When plaintiff’s employment ended before his anniversary date, the company refused to pay him any pro rata share of vacation for that year. (Id. at p. 777.)
The company argued employees terminated before their anniversary date had no right to vacation pay under section 227.3 because employment on that date “is a condition precedent to the ‘vesting’ of vacation rights.” (Suastez, supra, 31 Cal.3d at p. 778.) The employee contended annual vacation is earned by work performed throughout the year and vests as it is earned. (Id. at p. 779.)
The Court agreed with the employee. It noted vacation pay “is, in effect, additional wages for services performed.” (Suastez, supra, 31 Cal.3d at p. 779.) The Court explained, “The consideration for an annual vacation is the employee’s year-long labor. Only the time of receiving these ‘wages’ is postponed.” (Ibid.) In other words, “vacation pay is simply a form of deferred compensation.” (Id. at p. 780.) The Court likened “vacation pay” to “pension or retirement benefits, another form of deferred compensation” the right to which “ ‘vests upon the acceptance of employment [citations], even though the right to immediate payment of a full pension may not mature until certain conditions are satisfied.’ ” (Ibid.)
The Court recognized that “since the consideration for an annual vacation is the labor performed throughout the year, an employee whose employment is terminated midyear has not earned a full vacation. Nonetheless, the employee has earned some vacation rights ‘ “as soon as he has performed substantial services for his employer.” ’ ” (Suastez, supra, 31 Cal.3d at p. 780.) The Court explained that because the “right to some share of vacation pay vests, like pension rights, on acceptance of employment,” the “[n]onperformance of a condition subsequent, such as [the company’s] requirement that employees remain until their anniversary, can, at most, result in a forfeiture of the right to a vacation; it cannot prevent that right from vesting.” (Id. at p. 781.) Because section 227.3 prohibits forfeiture of vested vacation time on termination, the company’s policy was impermissible. (Suastez, at p. 781.)
The company nevertheless argued its eligibility requirement was “a condition precedent that prevents those rights from vesting at all.” (Suastez, supra, 31 Cal.3d at pp. 781- 782, italics omitted.) The Court rejected that contention, reasoning “once it is acknowledged that vacation pay is not an inducement for future services, but is compensation for past services, the justification for demanding that employees remain for the entire year disappears.” (Id. at p. 782.) Moreover, the Court interpreted the passage in section 227.3 that “all vested vacation shall be paid to [the employee] . . . in accordance with [the] contract of employment or employer policy respecting eligibility or time served” to mean “the amount of vacation pay an employee is entitled to be paid as wages,” not the time of vesting as the company had argued. (Id. at pp. 782-783.)
Because “vacation pay vests as it is earned, under . . . section 227.3,” after Suastez, employer policies such as those “ ‘allowing the forfeiture of vacation pay before one full year of service or which require[ ] employees to “use or lose” vacation pay by a specific date’ ” are prohibited. (Owen, supra, 175 Cal.App.4th at pp. 469-470.) Employers legitimately may limit the amount of vacation pay an employee accrues, however, by precluding accrual of additional vacation time once employees have reached an announced maximum. (Boothby v. Atlas Mechanical, Inc. (1992) 6 Cal.App.4th 1595, 1602 (Boothby).) Under such a “ ‘no additional accrual’ policy,” the employee does not forfeit vested vacation pay because “no more vacation is earned” once the maximum is reached; thus, “no more vests.” (Ibid.)
An employer also may adopt a policy that expressly provides new employees do not earn vacation time “during their initial employment.” (Owen, supra, 175 Cal.App.4th at p. 464; Minnick v. Automotive Creations, Inc. (2017) 13 Cal.App.5th 1000, 1003.) Again, because “no vacation pay is earned” during the waiting period, “none is vested.” (Owen, at p. 464.) Under such a policy, “employees cannot claim any right to vested vacation during their initial employment, because they know
in advance that they will not earn or vest vacation pay during this period.” (Id. at p. 465.)14 But “once an employee becomes eligible to earn vacation benefits he or she is simultaneously entitled to payment for unused vacation upon separation.” (Minnick, at p. 1007.)
b. Section 227.3 applies to EF’s policy because it was neither unlimited in practice nor conveyed as unlimited
It is undisputed EF had a policy of providing paid vacation or time off to area managers, including plaintiffs, triggering the first prong of section 227.3: “whenever . . . [an] employer policy provides for paid vacations . . . .” It also is undisputed that EF did not promise plaintiffs a specific amount of paid vacation that they would accrue over time or expressly tell them they were limited to a maximum amount of paid time off. EF and amici contend the second prong of section 227.3—“and an employee is terminated without having taken off his vested vacation time”— does not apply to unlimited vacation policies because no vacation time vests “if there is no fixed vacation bank.” In other words, they contend an accrued, fixed amount of vacation time is a precondition to the vesting of vacation wages.
Once EF opted to provide plaintiffs with paid vacation, by default that paid time off constituted additional wages attributable to the services plaintiffs rendered during the year, vesting as they labored under Suastez. (Suastez, supra, 31 Cal.3d at pp. 779, 782, 784; see Minnick, supra, 13 Cal.App.5th at
p. 1007 [under Suastez “all vacation pay is vested when earned”].) EF argues plaintiffs earned no vacation time—and thus none vested—to invoke section 227.3 because they did not labor “in exchange for a promise of a specific amount of vacation,” as in Suastez.
Under Owen, Minnick, and Boothby, an employer’s policy certainly may limit an employee’s ability to earn vacation during a specified period—whether at the start of employment or after a certain amount of vacation time has accrued. No vacation wages vest during such a period because the employee earns no vacation during that specified time. (Owen, supra, 175 Cal.App.4th at pp. 464, 471-472; Minnick, supra, 13 Cal.App.5th at p. 1002; Boothby, supra, 6 Cal.App.4th at p. 1602.)15 It is unclear, however, whether an employer that has a paid time off policy may limit an employee’s ability to earn vacation indefinitely. (The policies in Owen and Minnick did not permit employees to earn vacation for an initial probationary period—their first six and 12 months, respectively.) But once paid vacation is offered, any limit on an employee’s entitlement to it must be expressed
in a clear, written policy from the get-go. (Owen, at pp. 464-465; Minnick, at p. 1002; cf. Boothby, supra, 6 Cal.App.4th at p. 1598 [“accumulation of vacation time does not depend on an agreement which expressly permits it[;] . . . unused vacation accumulates unless the employment agreement legally prevents it”].)
In any event, we need not decide whether vacation wages are earned under an unlimited policy—whether “uncapped time off equate[s] to ‘vested vacation’ ”—as that is not the policy here. Not only was EF’s policy not in writing, but the record demonstrates EF never told plaintiffs it had an “unlimited” vacation policy or that their paid time off was not part of their compensation. EF may call its vacation policy “unlimited” or “uncapped,” but substantial evidence supports the trial court’s finding that it was not.
i. EF’s vacation policy had an implied limit
EF’s policy in practice was to give plaintiffs some fixed amount of vacation time. As the court said, EF expected plaintiffs to take vacation in the range typically available to corporate employees (such as two to six weeks), not an “unlimited” amount—for example, more than would be available under a traditional accrual policy—along the lines amici describe.16 See part 2.c. post. The trial testimony supports the court’s finding.
EHP operations manager Nicole Halverson testified she expected area managers would take “between two and four weeks” of vacation per year. When the court asked Halverson if area mangers, in her experience, ever took more than four weeks off, she responded, “potentially.” She could not say with certainty, however, whether she was aware of any area managers who had taken more than four weeks off. She believed one of her area mangers may have “gotten somewhat close to that.” Smith also approved 20 days (four weeks) of vacation for Heimann before she retired; he believed that amount was reasonable and wanted “to make the last few months that she was working with [EHP] good.”
Plaintiffs—who collectively worked for a total of almost 40 years—presented evidence they took about two weeks of vacation each year on average,17 but the record established they never sought or received more than four weeks (20 work days), as the trial court found. Moreover, substantial evidence supports the court’s implicit finding that plaintiffs’ schedules precluded them from taking advantage of EF’s purported unlimited time off policy. (Cf. Dept. of Industrial Relations, DLSE Opn. Letter
No. 1991.01.07 (Jan. 7, 1991) p. 2, archived at [where policy places a cap on the accumulation of accrued vacation, “ ‘an employee must be given a fair opportunity to take vacation at reasonable periods of time so that he or she can stay below the cap and continue vacation accruals’ ”].)
For example, the trial court asked Heimann why she took two weeks of vacation each year rather than four weeks or something else. She responded, “Basically, it was approximately all the time I could take off based on my schedule. And I knew I was entitled to at least two weeks off because no one ever told me exactly how much vacation time I had.” She also testified that it would have been “nice to be able to take unlimited time off,” but professed “the restrictions of the job probably wouldn’t have allowed [her] to take unlimited time off because [she] would not have been able to complete all [her] duties.”
McPherson testified similarly: “We were allowed to take vacation and get paid for that vacation. Certainly wasn’t unlimited and to the contrary it was very difficult to take much vacation at all due to the rigors of the job.” Former EHP regional director Joyce Dallam, who supervised area managers, testified, “It was very difficult for anyone to take any extended period of time. And most times, . . . [area managers] would take days added onto trips that the company gave us.” For example, area managers often added three or four extra days to the company’s annual November conferences, held in attractive travel destinations.
The testimony also established that EHP’s “peak season” started around April and lasted until the middle or end of August. Some regions, including McPherson’s and Brenden’s, also ran shorter winter programs in December, January, and/or February. During the peak season plaintiffs worked more than 100 hours a week, seven days a week, up to 18 hours per day. Although plaintiffs’ heaviest workload was during the April to August peak season, they presented evidence they worked full- time all year. Plaintiffs may have had more flexibility to take time off in the nonpeak season, but there was “still a lot of work . . . happening,” and no evidence they took extended vacations or substantially reduced their hours during that time.
McPherson moved from the area manager position to the program manager position in part because she “could no longer bear the burden of the[ ] hours.” She testified, “It was inhuman the amount of hours it required to have any kind of life.”
Area managers also were encouraged to recruit host families throughout the year and to get work for the summer season finished earlier in the spring.
The court heard testimony from EF representatives, plaintiffs, and former and current EF employees about the nature of plaintiffs’ work. We can infer the court found credible plaintiffs’ description of the amount of work their jobs required and their inability to take significant time off.
Moreover, the record simply does not show plaintiffs reaped the benefits that amici contend unlimited time off policies provide to employees.18 In contrast to the hypotheticals amici pose, there is no evidence plaintiffs’ schedule permitted—or EF would have approved—10 or 15 weeks off (or even three or four weeks at a time), significantly reduced hours during the off-peak season, or months of vacation spread throughout the off-peak season.
The record thus supports a finding that EF’s paid time off policy had an implied “cap” and was by no means “unlimited.”19 As the trial court said, an employer cannot avoid section 227.3 by leaving the amount of vacation time undefined in its policy while impliedly limiting the time actually available for approval.
ii. EF did not communicate the “unlimited” nature of its paid time off policy
Substantial evidence also supports the trial court’s finding that EF did not expressly convey the “unlimited” nature of its paid time off policy. In stark contrast to the accrual-based vacation policy in the EF handbook, which the parties agree did not apply to plaintiffs, EF conveyed its “unlimited” paid time off policy quite informally. According to the testimony, supervisors had a “side conversation” with newly hired area mangers to tell them about the vacation policy, or in some instances conveyed the policy by email. This is all plaintiffs were told: as area managers they could take paid vacation outside of the busy season, but their vacation did not accrue.20 The only other parameters EF clearly told plaintiffs were (1) they had to notify their supervisor before taking time off and ensure they could complete their work, and (2) they did not need to track their days off in the online system because they did not accrue vacation.
But no one at EF, for example, told plaintiffs they did not accrue vacation because they—unlike employees subject to the accrual policy—could take as much vacation as they wanted. Although plaintiffs understood they could take time off when their schedule permitted, they testified they did not understand the policy to be “unlimited,” as EF contends it was.21
Heimann testified no one told her she had unlimited vacation or time off as either an area manager or the west coast manager. She said, “It would have been nice to know that.”
“It would have been nice to have been able to take as much time as other salaried employees that had the same tenure as myself.” She knew she could take paid time off, but understood, “if I didn’t use the time, that I would lose it.” McPherson also testified she never was told she could “take as much vacation as [she] wanted.” She said, “I would have loved to have had as much [vacation] as my operations manager was receiving.” Former EHP employee Autumn Mostovoj, who supervised area managers at one point, also testified no one told her area managers were entitled to “unlimited vacation” or “unlimited time off at their discretion.” In fact, she found the policy “so confusing and so vague” that she used the vacation policy in the handbook to guide her even though she knew it did not apply to EHP area managers.
If EF intended to limit plaintiffs’ ability to earn vacation pay or treat their paid time off as something other than deferred wages, its “unlimited” policy had to be express and clear. (Cf. Owen, supra, 175 Cal.App.4th at p. 470 [employer “[b]y making it clear in advance that vacation is not part of a new employee’s compensation” did not “run afoul of the rule that prohibits an employer from reducing an employee’s wages for services after the service has been performed” (italics added)]; Minnick, supra, 13 Cal.App.5th at p. 1007 [if “clearly stated” a policy that provides a waiting period before employee earns vacation is enforceable (italics added)].) It was not.
EF never expressly told plaintiffs that their ability to take paid vacation was not part of their compensation. EHP’s 2000 and 2003 employee handbooks, “designed to address the unique needs of an at-home EF EHP employee,” refer to “[f]lextime,”
but they do not mention paid time off or vacation as part of that flextime. The paragraph on flextime states: “Since AMs [area managers] and RDs [regional directors] work at home, they are not required to hold specific ‘office hours.’ Instead, hours are determined more by the seasonal nature of the product. As with all salaried employees, AMs and RDs work the necessary number of hours to complete their work successfully.”22 The paragraph does not tell employees they may take unlimited paid time off as part of that “flextime,” or that their ability to do so is part of EF’s promise to allow flextime, not a promise of additional wages. And, as exempt employees, area managers were not subject to overtime, but expected to work as many hours as needed “to complete their work successfully.” EF may not have promised plaintiffs a specific amount of vacation time, but it promised them paid time off in some amount. Plaintiffs worked for EF in exchange for wages. Absent evidence to the contrary, under Suastez, those wages included the promised paid time off arising from the services they rendered during the year.
Moreover, EF’s policy gave plaintiffs no clear direction as to their rights or EF’s obligations under its “unlimited” paid time off policy. For example, EF did not warn plaintiffs of the consequences of failing to schedule a sufficient amount of time off, e.g., that they essentially would leave money on the table by working more hours for the same pay than those who scheduled more time off. (Cf. Owen, supra, 175 Cal.App.4th at p. 470 [“courts have approved employer vacation policies that warn employees, in advance, that they will cease to accrue vacation time accumulated in excess of an announced limit” (italics added)].) And its policy was not written down anywhere, so plaintiffs had nothing to consult. (See generally Owen, and Minnick, supra, 13 Cal.App.5th 1000 [affirming express, written vacation policies with waiting periods].)
Having failed to set out its purported unlimited vacation policy—or any limitations it imposed on earning vacation wages —in a clear, express writing (or otherwise), EF has not demonstrated that section 227.3 does not apply to its policy of providing paid vacation to plaintiffs. (See Kirby, supra, 53 Cal.4th at p. 1250 [courts must broadly construe employment statutes in favor of employees].)
c. Section 227.3 does not necessarily apply to all “unlimited” paid time off policies
Amici assert unlimited time off policies—which they contend do not result in vested vacation pay—“offer significant benefits to both employees and employers.” According to a 2019 study amici provide, “[u]nlimited paid time off” is the “emerging benefit” that interests employees most.
Amici explain, through persuasive hypotheticals,23 how the unlimited policies they describe intentionally allow for different employees doing the same job to take varying amounts of paid time off so that each employee may organize his or her time differently. Some may work longer hours and on weekends to be able to take more frequent and longer vacations throughout the year, while others may take fewer and shorter vacations to avoid working evenings and on weekends. In industries with a defined season, like accounting, employees may take significant time off during the off-season, having worked long hours during the busy season. As amici note, under an unlimited time off policy, “[e]mployees are trusted to fulfill their job responsibilities and are otherwise free to come and go.”
We appreciate the benefit and understand the appeal the unlimited time off policies amici describe may have to some employees. In concluding section 227.3 applies to EF’s vacation policy, we do not hold that section 227.3 necessarily applies to truly unlimited time off policies. Such a policy may not trigger section 227.3 where, for example, in writing it (1) clearly provides that employees’ ability to take paid time off is not a form of additional wages for services performed, but perhaps part of the employer’s promise to provide a flexible work schedule— including employees’ ability to decide when and how much time to take off; (2) spells out the rights and obligations of both employee and employer and the consequences of failing to schedule time off; (3) in practice allows sufficient opportunity for employees to take time off, or work fewer hours in lieu of taking time off; and (4) is administered fairly so that it neither becomes a de facto “use it or lose it policy” nor results in inequities, such as where one employee works many hours, taking minimal time off, and another works fewer hours and takes more time off. Unlimited paid time off under such a policy—depending on the facts of the case—very well may not constitute deferred compensation for past services requiring payment on termination under section 227.3.
d. Substantial evidence supports the court’s calculation of plaintiffs’ vacation wages
EF assigns several errors to the trial court’s finding that “20 days of vacation vested annually for each plaintiff, and any unused portion is payable at termination.” Substantial evidence supports the court’s finding.
i. The court’s finding that 20 days of vacation vested annually was proper
EF contends the court erred by determining how much vacation vested annually based on the amount of vacation “ ‘actually available’ ” to plaintiffs. EF again relies on McCarther where the Supreme Court rejected the Court of Appeal’s reasoning that an employer could calculate the amount of kin care required under section 233 based “on the amount of sick leave that the employee actually utilizes in one year.” (McCarther, supra, 48 Cal.4th at pp. 112-113.) As we have discussed, the Legislature made clear its intent that kin care available under section 233 be precisely ascertainable, while section 227.3 includes no such limitation on determining the amount of paid vacation due under the statute. (McCarther, at p. 111 [Legislature intended to limit section 233 “to employers that provide a measurable, banked amount of sick leave,” because the statute requires the amount of sick leave employers must allow employees to use for kin care to be calculated based on incrementally accrued time.].) We thus find McCarther’s holding inapplicable to section 227.3, which does not require the amount of annual paid vacation time to be precisely ascertainable from the employer’s policy.
EF also argues the trial court arbitrarily chose the highest number of vacation days approved for one plaintiff and imposed its own policy judgment that EF should have expressly defined the amount of vacation plaintiffs could take. We reject EF’s contentions. As the court said, EF’s failure to define its vacation policy was “a problem of proof.” Having concluded EF’s policy was subject to section 227.3—a conclusion we affirm—the court had to determine the amount of vacation time that vested each year as plaintiffs worked. The court’s consideration of the parties’ conduct to determine that amount, where EF’s policy did not expressly provide for it, was proper. (See, e.g., Civ. Code, § 1655 [“Stipulations which are necessary to make a contract reasonable, or conformable to usage, are implied, in respect to matters concerning which the contract manifests no contrary intention.”]; Guz v. Bechtel National, Inc. (2000) 24 Cal.4th 317, 336-337 [absent express agreement, parties’ conduct may evidence their understanding of particular employment terms, which “must be determined from the ‘totality of the circumstances’ ”]; Binder v. Aeta Life Ins. Co. (1999) 75 Cal.App.4th 832, 852-855 [determining parties’ implicit meaning of “good cause” based on circumstances and conduct where parties impliedly agreed to terminate employment only for good cause].)
In Binder, the employer agreed not to terminate the employee except for good cause, but there was no “particularized agreement” on what constituted good cause. (Binder, supra, 75 Cal.App.4th at pp. 852, 853-854.) The trial court, therefore, was required “to supply a meaning which [was] reasonable under the circumstances” by considering the parties’ conduct and the surrounding circumstances. (Id. at pp. 852, 855.) The court had to do the same here. EF agreed to provide paid vacation to plaintiffs, but there was no “particularized agreement” on the amount of annual vacation to which plaintiffs were entitled. The court thus considered the parties’ conduct and the circumstances to imply that term.
Substantial evidence supports the court’s finding that EF impliedly agreed plaintiffs were entitled to at least 20 days’ paid vacation annually under its undefined policy. EF’s management expected area managers would take up to four weeks’ vacation, and EF actually approved 20 days’ vacation at least once. Moreover, as EF created the “problem of proof,” the court’s decision to calculate the amount of vested vacation time plaintiffs earned each year based on the maximum amount of paid vacation that had been approved was reasonable. (Cf. Civ. Code, § 1654 [“language of a contract should be interpreted most strongly against the party who caused the uncertainty to exist”].
Because we conclude substantial evidence supports the court’s finding that 20 days of annual paid vacation was available to plaintiffs, we need not reach the issue of whether the Legislature intended section 227.3’s “ ‘principles of equity and fairness’ ” provision to apply in these circumstances.24
ii. The court did not err in calculating the amount of vacation wages EF owed plaintiffs
Substantial evidence also supports the court’s findings on the amount of vacation time each plaintiff actually used and the amount of vested time each had not used at the time of her termination. The court assessed plaintiffs’ credibility, considered the records submitted in evidence, and took into account failures of recollection elicited through cross-examination. The court found Heimann’s testimony particularly credible. As for McPherson and Brenden, the court added eight days to the amounts of vacation each of them recalled they took each year to account for misrecollections. Plaintiffs’ testimony is not unbelievable to reasonable minds; thus, we are bound by the court’s credibility determinations.
iii. Plaintiffs’ vacation wages are not time-barred
Finally, EF argues we should follow this district’s decision in Sequeira v. Rincon-Vitova Insectaris (1995) 32 Cal.App.4th 632, 636-637, and find the statute of limitations bars plaintiffs’ claim for vacation wages that vested more than four years before their termination. We are not bound by Sequeira and decline to follow it. As the parties note, more recent court opinions have held a plaintiff’s cause of action for unpaid vacation wages does not accrue until the employee leaves her employment. (Church v. Jamison, supra, 143 Cal.App.4th at pp. 1572, 1576; Soto v. Motel 6 Operating, L.P. (2016) 4 Cal.App.5th 385, 391-392.)
The trial court did not err when it followed Church and awarded plaintiffs vacation wages for the entire length of their employment.
3. On this record, section 206.5 precluded Brenden’s general release from releasing her vacation wage claims
When EF terminated Brenden’s employment, she negotiated and received a severance payment equal to three months’ salary ($11,362.50). The letter agreement Brenden signed included a general release of all claims, including those “under any federal or state labor . . . law[ ],” as well as an express waiver of her rights under Civil Code section 1542.26.
The agreement also stated: “You acknowledge that you have received your salary through September 30, 2015. No additional payments will be due or made to you for salary, bonus, commissions, benefits, severance, vacation, personal days, or otherwise other than as specified in this agreement.” EF contends this release Brenden signed as a condition of receiving her severance payment—a payment to which she was not otherwise entitled—bars her vacation pay claims, and as a matter of law section 206.5 thus did not invalidate the release.
Section 206.5 prohibits an employer from requiring an employee to release a claim for wages that are due and unpaid unless it has paid those wages. (§ 206.5, subd. (a).)27 Section 206.5 thus provides an exception to a general release of wage claims—known or unknown. That exception is limited, however. Wages are not considered “due” under the statute if the employer and employee have “a bona fide dispute” as to whether they are owed. (Chindarah v. Pick Up Stix, Inc. (2009) 171 Cal.App.4th 796, 803 (Chindarah).) Section 206.5 therefore does not preclude an employer and employee from “ ‘compromis[ing] a bona fide dispute over wages.’ ” (Chindarah, at pp. 801, 803 [finding release valid and explaining that, although statutory right to receive overtime is unwaiveable, no statute prevents an employee from releasing “his claim to past overtime wages as part of a settlement of a bona fide dispute over those wages”].) Accordingly, an employer may obtain a valid release as part of a compromise of an employee’s wage claim, without paying the full amount of wages claimed, if the employer has a good faith dispute that it does not owe the unpaid wages. (Watkins v. Wachovia Corp. (2009) 172 Cal.App.4th 1576, 1587 (Watkins).)
The trial court concluded Brenden’s release was invalid under section 206.5 as to her vacation pay claims because “no vacation-pay dispute . . . was being settled at the time of the release.” In other words, no bona fide dispute as to vacation pay existed between EF and Brenden. The court relied on Watkins in reaching its conclusion. There, another panel of this court found an employee validly released her wage claims when she “believed she possessed a claim for further overtime pay” and elected to receive “enhanced severance benefits” in exchange for releasing all her claims against her employer. (Watkins, supra, 172 Cal.App.4th at pp. 1586-1587.) The trial court here reasoned the court in Watkins “would have no reason to emphasize the employee’s belief that she possessed an overtime pay claim if that belief were not required for a valid release. That requirement makes some sense, in that otherwise an employer could—with regard to any employee—pay all the wages that it believed ‘due’ as consideration for a broad waiver of all other claims.”
We agree. California courts may “routinely enforce releases of disputed wage claims” as EF contends, but as plaintiffs note, in those cases the releases arose from pending wage disputes or litigation where actual controversies existed between the parties. (Watkins, supra, 172 Cal.App.4th 1576; Chindarah, supra, 171 Cal.App.4th at p. 803; Villacres v. ABM Industries Inc. (2010) 189 Cal.App.4th 562, 569, 589 [court- approved settlement of wage claims applied to later litigation of same cause of action]; Nordstrom Com. Cases (2010) 186
39
Cal.App.4th 576, 579 [court-approved settlement of commissions claims]; Aleman v. Airtouch Cellular (2012) 209 Cal.App.4th 556, 564-565, 578 [enforcing one plaintiff’s release of all claims
made while lawsuit for reporting time and split-shift wages was pending where releasing plaintiff argued “ ‘she was undisputedly entitled’ ” to reporting time and split-shift pay, but defendant disputed the claims]; Shine v. Williams-Sonoma, Inc. (2018)
23 Cal.App.5th 1070, 1077 [plaintiff collaterally estopped from bringing reporting-time pay claim against employer based on settlement of earlier-filed class action for failure to provide meal and rest periods, overtime and minimum wages, timely wages, and final paychecks because reporting-time claim—which is a claim for wages due—could have been raised in earlier action and employer disputed it owed reporting-time pay].)
EF contends the trial court’s own findings that EF had a good faith dispute as to whether it owed vacation wages, and its payment to Brenden of “the amount of wages that it conceded was due at the time,” takes Brenden’s release outside of section 206.5 as a matter of law. We disagree. The court’s finding of a “good faith dispute” concerned its conclusion that waiting time penalties under section 20328 were unwarranted because EF “had a good faith dispute as to whether vacation wages were due” given the “absence of on-point authority about undefined-amount vacation policies.” In other words, the trial court concluded EF did not willfully withhold wages from plaintiffs, including Brenden.
That finding, however, does not require us to conclude a bona fide dispute over wages existed for purpose of determining if section 206.5 invalidated Brenden’s release of her vacation pay claims. A “dispute” is “[a] conflict or controversy . . . .” (Black’s Law Dict. (11th ed. 2019) p. 593.) It necessarily requires two competing sides. So, for there to have been a releasable bona fide “dispute” over Brenden’s vacation wages, there must have been a disagreement between the parties about her right to those wages. But when Brenden signed the severance agreement neither she nor EF knew EF owed her unpaid vacation wages. No conflict existed between them over vacation pay or any other earned, but unpaid wages, for that matter. There is no evidence that— during the severance payment negotiations or when she signed the release—Brenden asserted an entitlement to vacation wages that EF disputed or that EF told Brenden she was not entitled to vacation wages that she asserted were owed.
The opening paragraph of the severance agreement confirms it was not a settlement of a disputed wage claim:
“We want you to know that your work here has been appreciated and in order to assist you as you make the transition to new employment, we would like to offer you the following package.” Paragraphs containing the severance payment, release, and other provisions follow. The release is made “[i]n exchange for salary continuation,” but nowhere does the agreement state its purpose includes resolving a wage dispute between the parties. (See, e.g., Reynov v. ADP Claims Services Group, Inc. (N.D.Cal., Apr. 30, 2007, No. C 06-2056 CW) 2007 U.S. Dist. Lexis 31631 at p. *3 (Reynov), relied on by EF [agreement’s stated purpose to provide employee “ ‘certain benefits that you would not otherwise receive, and resolve any remaining issues between you and [employer]’ ”].) Hart even increased Brenden’s severance payment from two months’ to three months’ salary after Brenden asked him, “Can you see it in your heart to give me three months[’] salary?”
In other words, Brenden did not accept the severance payment after negotiating “the consideration [she was] willing to accept in exchange” for her release of “claims for disputed wages.” (Nordstrom Com. Cases, supra, 186 Cal.App.4th at p. 590 [“Employees may release claims for disputed wages and may negotiate the consideration they are willing to accept in exchange.”].) Because Brenden released a claim for past wages EF owed her where no dispute over those wages existed, the trial court did not err in finding the release void as to her vacation pay claim under section 206.5.
We do not find Brenden’s release is invalid in any other respect. We also do not hold a subjective belief in or enumeration of the specific wage claim necessarily is required at the time an employee signs a release of wage claims.29 We reject EF’s contention that finding the release here void under section 206.5 will result in nullifying express waivers of Civil Code section 1542. An employee may agree to waive her rights and release unknown claims to settle a bona fide disagreement over whether her employer owes her wages. Based on the existing case law, however, there must exist at least a “bona fide” or “good faith” dispute between the parties at the time the employee releases a claim for past wages for the release to be valid under section 206.5.
We also conclude the trial court did not err when it found EF not entitled to an offset of Brenden’s damages for the severance payment. As plaintiffs contend, EF may enforce the general release as to non-wage claims not affected by section 206.5. The court reasonably could conclude the consideration EF paid Brenden also purchased the release of nonwage claims—age discrimination or contract-based claims, for example—and thus no offset was required.
4. The trial court erred when it found section 227.3 applied to Heimann after she moved to Virginia
EF appeals from the judgment awarding Heimann vacation wages on the separate ground that section 227.3 did not apply to her after she moved to Virginia in 2005. EF thus argues that, if we affirm the trial court’s finding that section 227.3 applied to EF’s unlimited paid time off policy, Heimann’s damages award must be reduced to exclude vacation wages earned after she moved. Although substantial evidence31 supports the trial court’s factual findings that Heimann’s work “focused on activities and people actually in California,” and she temporarily resided in California for “weeks or months consecutively,” we conclude the court erred in its application of Sullivan v. Oracle Corp. (2011) 51 Cal.4th 1191 (Sullivan) to find section 227.3 applied to Heimann after she became a Virginia resident.
California’s Legislature expressly has declared that “[a]ll protections, rights, and remedies available under state law . . . are available to all individuals regardless of immigration status . . . who are or who have been employed, in this state.” (§ 1171.5, subd. (a); Sullivan, supra, 51 Cal.4th at p. 1198.) Although the Legislature enacted section 1171.5 to protect undocumented workers “from sharp practices,” our Supreme Court has interpreted that section as expressing the Legislature’s desire to protect all individuals employed in the state regardless of their residency. (Sullivan, at p. 1997 & fn. 3 [“no reason exists to believe the Legislature intended to afford stronger protection under employment laws to persons working illegally than to legal nonresident workers”].)
In Sullivan, our Supreme Court answered certified questions from the United States Court of Appeals for the Ninth Circuit “about the applicability of California law to nonresident employees who work both [in California] and in other states for a California-based employer.” (Sullivan, supra, 51 Cal.4th at p. 1194.) After performing a conflict-of-laws analysis, the Court held California’s overtime law applied to nonresident employees who performed full days and weeks of work in California. (Sullivan, supra, 51 Cal.4th at pp. 1201, 1206, italics added.)
In so holding, the Court examined California’s “strong interest in governing overtime compensation for work performed in California.” (Id. at p. 1201.) The Court cautioned that, although it had found California’s overtime laws applied to nonresidents performing work within California’s borders, “one cannot necessarily assume the same result would obtain for any other aspect of wage law.” (Sullivan, supra, 51 Cal.4th at p. 1201, italics added.) The Court explained, “California’s interest in . . . an out-of-state business’s . . . treatment of its employees’ vacation time, for example, may or may not be sufficient to justify choosing California law over the conflicting law of the employer’s home state.” (Ibid.)
In concluding section 227.3 applied to Heimann, the trial court agreed Sullivan did not mean to apply California wage laws to “all work with some connection to California,” but found “the standard [was] not so high that the employee’s work must be ‘entirely’ in California.” Sullivan, however, does not support the court’s implicit finding that California wage laws should be applied to work performed outside of California by a nonresident even if that work is “focused on activities and people actually in California.” Indeed, Sullivan reached the opposite result. Although the Court held California’s overtime law applied to overtime work the nonresident plaintiffs performed in the state, it also held California’s unfair competition law (UCL) did not apply to “overtime work performed outside California for a California-based employer by [the] out-of-state plaintiffs.” (Sullivan, supra, 51 Cal.4th at pp. 1208-1209.) The Court concluded neither the language of the UCL nor its legislative history indicated the Legislature intended the UCL to apply to “ ‘ “occurrences outside the state.” ’ ” (Id. at p. 1207.)
As with the UCL, “[n]either the language of [section 227.3] nor its legislative history provides any basis for concluding the Legislature intended [section 227.3] to operate extraterritorially.” (Sullivan, supra, 51 Cal.4th at p. 1207 [presumption against extraterritorial application of state law].) Most of Heimann’s work may have been to support programs in California, but as a Virginia resident she did not perform most of her work in California. Based on the record, at most Heimann worked in California for about 12 to 13 weeks per year—about two months or so in the summer and additional days, or perhaps a week at a time, in January or February and in April or September. She thus spent at least 75 percent of her time performing work in Virginia from June 2005 to October 2014.
At a minimum, therefore, section 227.3 does not apply to work Heimann performed in Virginia or in any other state outside of California. (Norwest Mortgage, Inc. v. Superior Court (1999) 72 Cal.App.4th 214, 222 (Norwest Mortgage) [“we do not construe a statute as regulating occurrences outside the state unless a contrary intention is clearly expressed or reasonably can be inferred from the language or purpose of the statute”].)
That leaves the question of whether section 227.3 applies to vacation time Heimann earned during the time she temporarily worked in California each year. No California decision has considered whether section 227.3 applies to a nonresident employee of a non-California employer who periodically worked in California. In ruling section 227.3 applied to all work Heimann performed for EHP while a Virginia resident, the trial court overstated Sullivan’s description of California’s interest in applying its wage laws. Quoting from Sullivan, the trial court stated, “ ‘California has, and has unambiguously asserted, a strong interest in applying its [wage and hour] law . . . to all work performed, within its borders.’ ” The trial court replaced “overtime” with “wage and hour” and omitted “to all nonexempt workers.” Our Supreme Court actually declared, “California has, and has unambiguously asserted, a strong interest in applying its overtime law to all nonexempt workers, and all work performed, within its borders.” (Sullivan, supra, 51 Cal.4th at p. 1203.) The trial court’s substitution and omission change the meaning of the quotation. The statement referred only to California’s asserted interest in applying its overtime laws to all nonexempt workers performing work in the state—not all of its wage and hour laws to all work performed in the state. Moreover, earlier in its opinion the Court expressly stated it was not deciding “the applicability of any provision of California wage law other than the provisions governing overtime compensation.” (Sullivan, supra, 51 Cal.4th at p. 1201.)
The Court also found “of doubtful validity” the employer’s “assumption that, if out-of-state employers must pay overtime under California law, they must also comply with every other technical aspect of California wage law,” including “the accrual and forfeiture of vacation time.” (Id. at pp. 1200, 1202.)
We share the Court’s doubt. We cannot conclude California intended section 227.3—a law that governs the payment of unused vested vacation time when an employee’s employment ends—to apply under the circumstances here: where a nonresident, exempt employee of a non-California employer
has periodically performed work within California, has received no California wages, and has paid no California income taxes on any wages earned.
First, we do not believe California has an interest in ensuring an employee who voluntarily leaves California to become a resident of another state is paid vacation wages at the end of her employment by a non-California employer when she worked temporarily within the state.33 Heimann was not a California wage earner from mid-2005 until her retirement. She described herself as “relocating” to California every summer. But the record does not support a finding that Heimann was a part-time resident of California as she and the trial court seem to imply. For purposes of the Revenue & Taxation Code, a resident is an individual in the state “for other than a temporary or transitory purpose.” (Rev. & Tax. Code, § 17014, subd. (a)(1).) An individual in California “to complete a particular transaction, or perform a particular contract, or fulfill a particular engagement,” requiring her presence here for “a short period,” is considered in the state for a temporary or transitory purpose. (Cal. Code Regs., tit. 18, § 17014, subd. (b).) The Franchise Tax Board gives the example of an executive who lives in New York with his family, but travels to California for business for one or two weeks at a time, for a total of six weeks a year, as a nonresident. (Cal. Franchise Tax Bd., Pub. No. 1031, Guidelines for Determining Resident Status (2018), at p. 5.) Essentially, “the state with which a person has the closest connection during the taxable year is the state of his residence.” (Cal. Code Regs., tit. 18, § 17014, subd. (b).)
Heimann gave up her status as a California resident when she moved to Virginia. She lived in California during the summer for a particular, limited business purpose—to oversee student trips for the summer program. EF paid for Heimann to stay in a hotel or a dormitory for the summer. She did not maintain a home in California or own any property here. Heimann had her mail temporarily forwarded from Virginia to California each summer, but there is no evidence she permanently changed her address or residence status. She also gave up her California driver’s license and registered to vote in Virginia after she moved. Heimann opened and maintained a California bank account on behalf of EHP as part of her job, but nothing in the record shows she had a personal bank account in California after she moved. There is no evidence that Heimann maintained any close ties to California after she moved so that she could be considered a “resident” for part of the year.
Moreover, a part-time resident must pay California taxes on all income earned while a California resident, regardless of source, and on income earned from California sources while a nonresident.34 (Rev. & Tax Code, §17041, subd. (i)(1)(A) & (B) [tax imposed on part-time residents and nonresidents].) If Heimann were a part-year California resident, as she seems to contend, she would have been required to pay California income taxes on income she earned from EF during her California stay. She did not.35 It is undisputed that (1) California wages for work she performed here while a Virginia resident; (2) she has not paid California income taxes since the 2005 tax year; and (3) she has paid Virginia state income tax on her wages since 2005.
Nor was Heimann operating under a California employment contract after she moved to Virginia. EHP retained its area managers (including the west coast manager) from year to year, orally informing the manager about the company’s intent to retain her, followed up with a letter agreement. Heimann testified she usually (but not always) received offer letters for her west coast manager position annually. The record includes an October 2007 offer letter from EHP’s director of operations
in Massachusetts sent to Heimann at her Virginia address, confirming her salary for that fiscal year. Nothing in the record, however, demonstrates Heimann received or accepted her annual employment renewal in California after 2005 so that she would have expected California law to apply to her employment after she moved.
The exclusion of a nonresident, temporary worker from section 227.3 does not implicate the same concerns as the exclusion of nonresidents from California’s overtime laws. Although section 227.3 serves the important goal of ensuring California workers do not forfeit vacation wages when their employment ends, it does not protect workers’ and the public’s health and safety or “expand[ ] the job market by giving employers an economic incentive to spread employment throughout the workforce” as do California’s overtime laws. (Sullivan, supra, 51 Cal.4th at p. 1198.) As the Sullivan Court explained, “[t]o exclude nonresidents from the overtime laws’ protection would tend to defeat their purpose by encouraging employers to import unprotected workers from other states.” (Ibid.) No such concern exists with section 227.3 on the facts here. EF did not “import” Heimann to work in California to avoid section 227.3. Heimann voluntarily moved from California, and EF let her keep her position even though it meant having to pay for Heimann to stay in California during the summer.
California’s overtime law and vacation pay law also apply differently to nonresidents as a practical matter. California’s wage laws governing nonexempt employees—overtime, meal and rest breaks, etc.—apply as the employee performs work within the state. The moment the nonresident employee has worked more hours in a day or week than permitted, the overtime law’s application is mandatory unless a statutory exception applies. (§ 510, subd. (a).) Nor may the employee and employer contract around the right to overtime. (Sullivan, supra, 51 Cal.4th at p. 1198, citing § 1194.)
The right to paid vacation, on the other hand, is governed by contract. California does not require employers to provide paid vacation to employees. (Owen, supra, 175 Cal.App.4th at p. 468.) Thus, section 227.3 does not come into play unless (1) the employer’s contract or policy provides employees paid vacation, (2) the employee’s employment has terminated, and (3) the employee has unused, vested vacation time. An employer, therefore, will not know if it must pay unused vacation wages under California’s law to a non-California employee until she quits, retires, is laid off, or is fired, and that may not happen until long after the employee has performed any work in California. By contrast, an employer can determine immediately whether California’s overtime law is implicated.
It simply is not practical to require a non-California employer to apply section 227.3 to a non-California resident who periodically works in California. As EF notes, applying section 227.3 in these circumstances would create an administrative nightmare the Legislature surely could not have intended.
For example, an employer whose employee works on projects in different states not only would have to keep track of how much proportionate vacation time the employee earned in each state based on how long she worked in that state, but also treat those portions of vested vacation time differently depending on the law of the state where the vacation vested.
The employer also would have to determine which earned vacation days from which state the employee had used. Let’s assume an employee earned three weeks of vacation based on work performed in the state of Virginia, earned one week of vacation based on time worked in California, took one week of vacation that year, and then retired. Does the employer owe the employee nothing under section 227.3 because the employee used up the one week of vacation earned while in California? Or, must the employer split the used week between the time earned in California and in Virginia so that a portion of that week is considered unused and owing to the employee under section 227.3? How would the employer decide whether the employee had any unused vacation pay earned from work in California when her employment ended? Applying section 227.3 under these circumstances would require the Legislature or courts to become involved in the administration of a non-California employer’s contractual vacation policy with nonresidents. We do not find this tenable. These practical problems simply do not arise from Sullivan’s application of an hourly wage law to nonresidents temporarily working in the state. An employer like that in Sullivan could not be faced with applying two different overtime laws to an employee because the employee obviously cannot perform the same hours of work in two different states. Because we conclude section 227.3 does not apply to vacation Heimann earned, but did not use, after she moved to Virginia in 2005,36 we need not engage in a conflict of laws analysis. (See Norwest Mortgage, supra, 72 Cal.App.4th at p. 228.)
Accordingly, Heimann’s damages for unpaid vacation wages must be reduced by the amount of vacation time she earned, but did not use, after she became a Virginia resident.
5. Substantial evidence supports the trial court’s finding that EF terminated McPherson’s employment on November 6, 2015
EF also appeals from the judgment awarding McPherson her unpaid salary for November 1 through 6, 2015. EF contends the award must be reversed because (1) McPherson’s one-year program manager position expired on September 30, 2015, the end date stated in her offer letter, which coincided with the end of EF’s fiscal year, and (2) McPherson performed no work during November. The trial court concluded McPherson was terminated not on September 30 but on November 6, 2015. Substantial evidence supports the trial court’s findings and judgment in McPherson’s favor.
EF contends McPherson’s employment automatically ended on September 30 because it was a “fixed-term employment contract.” EF relies on Schimmel v. NORCAL Mutual Ins. Co. (1995) 39 Cal.App.4th 1282, 1285 (referring to nature of fixed- term employment contract in considering question of tort liability for nonrenewal of a fixed term insurance policy). Schimmel cited section 2920, which provides “employment is terminated by . . . [¶] [e]xpiration of its appointed term.” Here, however, the trial court concluded that—based on EHP’s conduct—“an objective employee in McPherson’s position would have concluded she was still employed” after September 30. The court heard extensive testimony and considered several exhibits on this issue. We infer it resolved any credibility issue in McPherson’s favor. The evidence, summarized below, supports the court’s findings.
McPherson admitted the program manager position was a fixed, one-year trial position that would end on September 30, 2015. She also understood, through conversations with EHP management, that she and EHP would evaluate the pilot program at the end of the year to decide whether to continue it. On September 15, 2015, after Hart told McPherson there was no budget to continue the program manager position, he invited her to propose a different position for the 2015-2016 fiscal year. She did so by email two days later. On September 23, 2015, Hart left McPherson a voicemail message that he needed more time to review her proposal. He said, “ ‘Terri, I wanted to let you know if the answer were “no” you would have heard it by now.’ ” He hoped she had not looked for another job and told her to “ ‘hang tight.’ ” He hoped his message had “put[ ] [her] at ease.” We conclude, a reasonable person would—as McPherson did— consider this statement from EHP’s president a confirmation that EHP was in fact considering her proposal to continue her employment for the 2015-2016 year.
McPherson sent Hart an email telling him she could wait. In the weeks that followed, McPherson continued to do some work, held off on looking for another job, and emailed Hart more than once asking about her status. He did not respond. Nor did EHP tell McPherson her employment would terminate on September 30, 2015. McPherson never saw an email announcing her termination, as EHP had done when other employees left.
EF continued to pay McPherson’s salary in October 2015, although Hart testified the payment was an “oversight.” Hart did not affirmatively tell McPherson there was no budget to keep her on in a different position for the 2015-2016 season until November 6, 2015. As the trial court found, before that date EHP acted as if McPherson remained employed while EHP considered whether it was able to extend her employment.
Moreover, the record demonstrates EHP did not have a practice of letting its employees’ (or at least area managers’) employment automatically terminate at the end of the fiscal year. For example, when McPherson’s position changed from area manager to program manager, she was not terminated and then rehired. She remained employed after September 30 even though she did not receive her employment letter for the program manager position until December 1, 2014. Before McPherson became a program manager, she received letters each year renewing her employment for the next fiscal year. The letters often did not arrive until October, November, or December. Instead, before the end of the fiscal year, EHP let McPherson know whether her contract would be renewed. Hart also confirmed it was customary to renew area managers’ contracts after the fiscal year’s end.
Given the parties’ discussion of the possibility of another position, Hart’s assurances, EHP’s practices surrounding the renewal or nonrenewal of annual contracts, and EHP’s continued payment of McPherson’s salary, the trial court reasonably concluded EF did not terminate McPherson’s employment until November 6, 2015, when it told her it was doing so.
We also reject EF’s contention that McPherson is not entitled to her wages from November 1 to 6, 2015, because she was on vacation in New Orleans and performed no work.
As noted, the trial court reasonably concluded McPherson’s employment did not end until November 6. Under EF’s paid time off policy, McPherson was required only to notify her supervisor when she wanted to take time off, unless it was the busy season. November was not the busy season, and McPherson informed Hart of the days she was taking off and where she was going. That time was legitimate paid time off, according to EF’s policy, for which McPherson was not compensated.
6. The attorney fees award
EF contends that, if we reverse part of the judgment, we also must reverse the court’s postjudgment order awarding plaintiffs attorney fees. Although EF did not file a notice of appeal from that award—and thus we lack jurisdiction to review it—“this does not mean that an award of attorney fees to the party prevailing stands after reversal of the judgment.” (Allen v. Smith (2002) 94 Cal.App.4th 1270, 1284; see Ventas Finance I, LLC v. Franchise Tax Bd. (2008) 165 Cal.App.4th 1207, 1233- 1234 [reversing postjudgment order awarding attorney fees because court could not “say with certainty that the [trial] court would exercise its discretion the same way” in light of partial reversal of judgment].) Rather, “ ‘[a]n order awarding costs falls with a reversal of the judgment on which it is based.’ ” (Allen, at p. 1284.) Accordingly, the trial court should consider whether to modify the attorney fee award in light of our partial reversal of the judgment as to Heimann.
DISPOSITION
The judgment is reversed in part as to the amount of damages awarded Heimann for unpaid vacation wages. We remand the matter to the trial court with directions to (1) recalculate Heimann’s damages and prejudgment interest by excluding from that award any unused vacation time that vested after she moved to Virginia in June 2005; and (2) conduct further proceedings on whether to modify the attorney fee award in light of our partial reversal of the judgment. The judgment is affirmed in all other respects. The parties are to bear their own costs on appeal.
FSLA Regular Rate of Pay
Regular Rate of Pay - FLSA Final Ruling
SOURCE:
KEY WORDS:
Overtime Rate Calculation, Calculate Regular Rate of Pay
AGENCY:
Wage and Hour Division, Department of Labor
ACTION:
Final rule
Document Citation:
84 FR 68736
SUMMARY:
The Fair Labor Standards Act (FLSA or Act) generally requires that covered, nonexempt employees receive overtime pay of at least one and one-half times their regular rate of pay for time worked in excess of 40 hours per workweek. The regular rate includes all remuneration for employment, subject to the exclusions outlined in section 7(e) of the FLSA. In this final rule, the Department of Labor (Department) updates a number of regulations on the calculation of overtime compensation both to provide clarity and to better reflect the 21st-century workplace. These changes will promote compliance with the FLSA, provide appropriate and updated guidance in an area of evolving law and practice, and encourage employers to provide additional and innovative benefits to workers without fear of costly litigation.
DATES:
This final rule is effective on January 15, 2020.
SUPPLEMENTARY INFORMATION:
I. Executive Summary
The FLSA generally requires covered employers to pay nonexempt employees overtime pay of at least one and one-half times their regular rate for hours worked in excess of 40 per workweek. The FLSA defines the regular rate as “all remuneration for employment paid to, or on behalf of, the employee”—subject to eight exclusions established in section 7(e).[1] Part 778 of CFR title 29 contains the regulations addressing the calculation of the regular rate of pay for overtime compensation under section 7 of the FLSA.
The Department promulgated the majority of part 778 of CFR title 29 more than 60 years ago, when typical compensation often consisted predominantly of traditional wages, paid time off for holidays and vacations, and contributions to basic medical, life insurance, and disability benefits plans.[2] Since that time, the workplace and the law have evolved, but the Department has only made minor updates to part 778 since 1950.[3]
First, employee compensation packages, including employer-provided benefits and “perks,” have expanded significantly. The Bureau of Labor Statistics (BLS) estimated that fringe benefits comprised only 5 percent of employees' total compensation in 1950.[4] Today, such benefits make up approximately one-third of total compensation.[5] Many employers, moreover, now offer various wellness benefits or perks, such as fitness classes, nutrition classes, weight loss programs, smoking cessation programs, health risk assessments, vaccination clinics, stress reduction programs, and training or coaching to help employees meet their health goals.
Both law and practice concerning more traditional benefits, such as sick leave, have likewise evolved in the decades since the Department first promulgated part 778. For example, instead of providing separate paid time off for illness and vacation, many employers now combine these and other types of leave into paid time off plans. Moreover, in recent years, a number of state and local governments have passed laws requiring employers to provide paid sick leave. In 2011, for example, Connecticut became the first state to require private-sector employers to provide paid sick leave to their employees.[6] Today, several states, the District of Columbia,[7] and various cities and counties [8] require paid sick leave, and many other states are considering similar requirements.
Recently, several states and cities have also begun considering and implementing scheduling laws. In the last 5 years, for example, New York, San Francisco, Seattle, and other cities have enacted laws imposing penalties on employers who change employees' schedules without the requisite notice, and various state governments are considering and beginning to pass Start Printed Page 68737similar scheduling legislation.[9] Some of these laws expressly exclude these penalties from the regular rate under state law,[10] but questions remain for employers determining how these and other penalties may affect regular rate calculations under federal law.
The Department published a notice of proposed rulemaking (NPRM) in the Federal Register on March 29, 2019 (84 FR 11888 (Mar. 29, 2019)), inviting comments about proposed updates to its regulations in part 778 to reflect changes in the modern workplace and to provide clarifications that reflect the statutory language and WHD's enforcement practices. Additionally, the Department proposed minor clarifications and updates to part 548 of title 29, which implements section 7(g)(3) of the FLSA. Section 7(g)(3) permits employers, under specific circumstances, to use a basic rate to compute overtime compensation rather than a regular rate.[11] Comments were initially due on or before May 28, 2019. In response to a request for an extension of the time period for filing written comments, the Department extended the deadline to June 12, 2019 (84 FR 21300 (May 14, 2019)). The Department received approximately 80 timely comments.
After considering the comments, the Department has decided to adopt the NPRM's proposed changes with some modifications. The final rule clarifies when payments for forgoing unused paid leave, payments for bona fide meal periods, reimbursements, benefit plan contributions, and certain ancillary benefits may be excluded from the regular rate. The final rule also revises certain sections of the existing regulation to more closely align with the Act. Additionally, the final rule incorporates, with modification, the proposed clarifications and updates to part 548. The final rule incorporates numerous suggestions from commenters, including adding examples of excludable state and local scheduling law payments to § 778.222, which addresses “other payments similar to call-back pay”; providing additional guidance in the preamble about how to determine whether a bonus is discretionary or nondiscretionary; revising language at §§ 778.202 and 778.205 to reflect that excludable overtime premium payments may be made pursuant to a “written or unwritten employment contract, agreement, understanding, handbook, policy, or practice”; and referencing state or local minimum wage laws as well as Federal law in the regulations at part 548 of title 29 discussing the basic rate.
The Department's estimated economic impact of this final rule follows below. The Department qualitatively estimates the potential benefits associated with reduced litigation at $281 million over 10 years, or $28.1 million per year. The Department quantitatively estimates the one-time regulatory familiarization cost of this final rule at $30.5 million, which results in a 10-year annualized cost of $3.6 million at a discount rate of 3 percent or $4.3 million at a discount rate of 7 percent.
This final rule is considered an Executive Order (E.O.) 13771 deregulatory action. Details on the estimated reduced burdens and cost savings of this final rule can be found in the rule's economic analysis.
II. Background
A. The FLSA and Regular Rate Regulatory History
Congress enacted the FLSA in 1938 to remedy “labor conditions detrimental to the maintenance of the minimum standard of living necessary for health, efficiency, and general well-being of workers[,]” which burdened commerce and constituted unfair methods of competition.[12] In relevant part, section 7(a) of the FLSA requires employers to pay their employees overtime at one and one-half times their “regular rate” of pay for time worked in excess of 40 hours per workweek.[13] When enacted, however, the FLSA did not define the term “regular rate.”
Later that year, WHD issued an interpretive bulletin addressing the meaning of “regular rate,” which WHD later revised and updated in 1939, and again in 1940. The 1940 version of the bulletin stated, among other things, that an employer did not need to include extra compensation paid for overtime work in regular rate calculations.[14] It also specified that the regular rate must be “the rate at which the employee is actually employed and paid and not . . . a fictitious rate which the employer adopts solely for bookkeeping purposes.” [15]
In 1948, the Supreme Court in Bay Ridge Operating Co. v. Aaron, 334 U.S. 446, addressed whether specific types of compensation may be excluded from the regular rate, or even credited towards an employer's overtime payment obligations. The Court held that an overtime premium payment, which it defined as “[e]xtra pay for work because of previous work for a specified number of hours in the workweek or workday whether the hours are specified by contract or statute,” could be excluded from the computation of the regular rate.[16] Permitting an “overtime premium to enter into the computation of the regular rate would be to allow overtime premium on overtime premium—a pyramiding that Congress could not have intended.” [17] The Court also held that “any overtime premium paid, even if for work during the first forty hours of the workweek, may be credited against any obligation to pay statutory excess compensation.” [18] By contrast, the Court noted, “[w]here an employee receives a higher wage or rate because of undesirable hours or disagreeable work, such wage represents a shift differential or higher wages because of the character of work done or the time at which he is required to labor rather than an overtime premium. Such payments enter into the determination of the regular rate of pay.” [19]
Following the Bay Ridge decision, in 1948, the Department promulgated 29 CFR part 778, concerning the regular rate.[20] This regulation codified the principles from Bay Ridge that extra payments for hours worked in excess of a daily or weekly standard established by contract or statute may be excluded from the regular rate and credited toward overtime compensation due, and that extra payments for work on Saturdays, Sundays, holidays, or at night that are made without regard to the number of hours or days previously worked in the day or workweek must be included in the regular rate and may not be credited toward the overtime owed.[21] Start Printed Page 68738It noted, however, that when extra payments for work on Saturdays, Sundays, holidays, or nights are contingent on the employee having previously worked a specified standard number of hours or days, such payments are true overtime premium payments that may be excluded from the regular rate and credited toward overtime compensation due.[22] The Department also explained that payments “that are not made for hours worked, such as payments . . . for idle holidays or for occasional absences due to vacation or illness or other similar cause” may be excluded from the regular rate, but could not be credited against statutory overtime compensation due.[23]
In 1949, Congress responded to the Bay Ridge decision by amending the FLSA to identify two categories of payments that could be both excluded from the regular rate and credited toward overtime compensation due.[24] The first category was extra compensation for work on Saturdays, Sundays, holidays, or the sixth or seventh day of the workweek paid at a premium rate of one and one-half times the rate paid for like work performed in nonovertime hours on other days. The second category was extra compensation paid pursuant to an applicable employment contract or collective bargaining agreement for work outside of the hours established therein as the normal workday (not exceeding eight hours) or workweek (not exceeding 40 hours) at a premium rate of one and one-half times the rate paid for like work performed during the workday or workweek.[25]
On October 26, 1949, Congress again amended the FLSA.[26] The amendments added, among other things, a comprehensive definition of the term “regular rate.” [27] “Regular rate” was defined to include “all remuneration for employment paid to, or on behalf of, the employee[,]” [28] with the exception of an exhaustive list of seven specific categories of payments that could be excluded from the regular rate.[29] Those categories of excludable payments were: (1) Gifts and payments on special occasions; (2) payments made for occasional periods when no work is performed such as vacation or sick pay, reimbursements for work-related expenses, and other similar payments that are not compensation for hours of employment; (3) discretionary bonuses, payments to profit-sharing or thrift or savings plans that meet certain requirements, and certain talent fees; (4) contributions to a bona fide plan for retirement, or life, accident, or health insurance; (5) extra compensation provided by a premium rate for certain hours worked in excess of eight in a day, 40 hours in a workweek, or the employee's normal working hours; (6) extra compensation provided by a premium rate for work on Saturdays, Sundays, regular days of rest, or the sixth or seventh days of the workweek; and (7) extra compensation provided by a premium rate pursuant to an employment contract or collective bargaining agreement for work outside of the hours established therein as the normal workday (not exceeding eight hours) or workweek (not exceeding 40 hours).[30] The October 1949 amendments also added a provision specifying that the last three of these categories are creditable against overtime compensation due.[31]
In 1950, the Department updated part 778 to account for the 1949 amendments to the FLSA.[32] These regulations explained general principles regarding overtime compensation and the regular rate, including the principle that each workweek stands on its own for purposes of determining the regular rate and overtime due.[33] The regulations also provided methods for calculating the regular rate under different compensation systems, such as salary and piecework compensation.[34] They further elaborated on the seven categories of payments that are excludable from regular rate calculations, and provided several examples.[35] The regulations also addressed special problems and pay plans designed to circumvent the FLSA.[36]
In 1961 and 1966, Congress made a few minor, non-substantive language changes and redesignated certain sections.[37] In 1968, the Department updated part 778, principally to clarify the statutory references, update the amounts used to illustrate pay computations, and reorganize the provisions in part 778.[38] Over the next several decades, the Department periodically made minor changes and updates to part 778.[39]
In 2000, Congress added another category of payments that could be excluded from the regular rate, currently contained in section 7(e)(8).[40] This amendment permitted an employer to exclude from the regular rate income derived from a stock option, stock appreciation right, or employee stock purchase plan, provided certain restrictions were met.[41] Congress also amended section 7(h) to state that, except for the types of extra compensation identified in sections 7(e)(5), (6), and (7), sums excluded from the regular rate are not creditable toward minimum wage or overtime compensation due.[42] In 2011, the Department updated part 778 to reflect the 2000 statutory amendments and to modify the wage rates used as examples to reflect the current minimum wage.[43]
Currently, the FLSA's definition of “regular rate” and the eight categories of Start Printed Page 68739excludable payments are contained in section 7(e) of the Act.[44] The Department's regulations concerning the regular rate requirements are contained in 29 CFR part 778. As noted above, the last comprehensive revision to part 778 was in 1968.[45]
While section 7(a) defines the general overtime entitlement in terms of an employee's regular rate, under certain circumstances, the FLSA permits employers to use a “basic rate,” rather than the regular rate as defined in section 7(e), to calculate overtime compensation.[46] Congress added this provision, currently contained in section 7(g), in 1949—at the same time that Congress added the definition of “regular rate” to the FLSA.[47] The requirements an employer must meet to use a basic rate are set forth in that same section 7(g).[48]
In 1955, the Department promulgated 29 CFR part 548 to establish the requirements for authorized basic rates under section 7(g)(3).[49] It amended various sections of the part 548 regulations several times over the next 12 years to reflect statutory amendments to other parts of the FLSA, including increases to the minimum wage.[50] The Department has not updated any of the regulations in part 548 since 1967, more than a half-century ago.
B. The Department's Proposal
On March 29, 2019, the Department issued its proposal to update and revise a number of regulations in parts 548 and 778.[51] The Department's proposal focused primarily on clarifying whether certain kinds of “perks,” benefits, or other miscellaneous payments must be included in the regular rate. These clarifications included confirming that the cost of providing wellness programs, onsite specialist treatment, gym access and fitness classes, employee discounts on retail goods and services, and payments for tuition programs, such as reimbursement programs or repayment of educational debt, may be excluded from an employee's regular rate of pay. The Department also proposed to clarify that payments for unused paid leave, including paid sick leave, may be excluded from an employee's regular rate of pay; that reimbursed expenses need not be incurred “solely” for the employer's benefit for the reimbursements to be excludable from an employee's regular rate and that reimbursed travel expenses that do not exceed the maximum travel reimbursement permitted under the Federal Travel Regulation System and meet other regulatory requirements may be excluded from an employee's regular rate of pay; that employers do not need a prior formal contract or agreement with the employee(s) to exclude certain overtime premiums described in sections 7(e)(5) and (6) of the FLSA; and that pay for time that would not otherwise qualify as “hours worked,” including bona fide meal periods, may be excluded from an employee's regular rate unless an agreement or established practice indicates that the parties have treated the time as hours worked. Additionally, the Department proposed to provide examples of discretionary bonuses that may be excluded from an employee's regular rate of pay under section 7(e)(3) of the FLSA and to clarify that the label given to a bonus does not determine whether it is discretionary. The Department also proposed to provide additional examples of benefit plans, including accident, unemployment, and legal services, that may be excluded from an employee's regular rate of pay under section 7(e)(4) of the FLSA.
The Department proposed two substantive changes to the existing regulations. First, the Department proposed to eliminate the restriction in 29 CFR 778.221 and 778.222 that “call-back” pay and other payments similar to call-back pay must be “infrequent and sporadic” to be excludable from an employee's regular rate, while maintaining that such payments must not be so regular that they are essentially prearranged. Second, the Department proposed to update its “basic rate” regulations, which are authorized under section 7(g)(3) of the FLSA, as an alternative to the regular rate under specific circumstances. Under the current regulations, employers using an authorized basic rate may exclude from the overtime computation any additional payment that would not increase total overtime compensation by more than $0.50 per week on average for overtime workweeks in the period for which the employer makes the payment. The Department proposed to update this regulation to change the $0.50 limit to 40 percent of the Federal minimum wage—currently $2.90.
In developing this rule, the Department was mindful of the Supreme Court's recent guidance that, to determine the scope of an exemption under the FLSA, the statutory text must be given a “fair reading” rather than a narrow reading because the FLSA's exemptions are “as much a part of the FLSA's purpose as the [minimum wage and] overtime-pay requirement[s].” Encino Motorcars, LLC v. Navarro, 138 S. Ct. 1134, 1142 (2018). As the Third Circuit recently noted in a regular rate case, “that is as should be expected, because employees' rights are not the only ones at issue and, in fact, are not always separate from and at odds with their employers' interests.” U.S. Dep't of Labor v. Bristol Excavating, Inc., 935 F.3d 122, 135 (3d Cir. 2019).
Approximately 80 individuals and organizations timely commented on the NPRM during the 75-day extended comment period that ended on June 12, 2019. The Department received comments from a broad array of constituencies, including small business owners, employer and industry associations, individual workers, worker advocacy groups, unions, non-profit organizations, law firms, professional associations, and other interested members of the public. The majority of comments supported the Department's efforts to clarify the regular rate regulations. All timely received comments may be viewed on www.regulations.gov, docket ID WHD-2019-0002.
Some commenters appear to have mistakenly filed comments intended for this rulemaking into the dockets for the Department's rulemakings concerning overtime (docket ID WHD-2019-0001) or joint employer status (docket ID WHD-2019-0003) under the FLSA. The Department did not consider these misfiled comments in this rulemaking.
The Department has carefully considered the timely-submitted comments on the proposed changes. Some of the comments were general statements of support or opposition. See Bloomin' Brands; International Bancshares Corporation (IBC); Independent Bakers Association (IBA); National Demolition Association (NDA); National Federation of Independent Businesses (NFIB); International Association of Firefighters (Association Start Printed Page 68740of Firefighters); and various individual commenters.
The Department received a number of comments that are beyond the scope of this rulemaking. These include, for example, a request to address whether restricted stock units are excludable under 29 U.S.C. 207(e)(8) of the Act, which permits an employer to exclude from the regular rate income derived from a stock option, stock appreciation right, or employee stock purchase plan. See Semiconductor Industry Association (SIA); National Association of Manufacturers (NAM); the Chamber of Commerce (Chamber); Partnership to Protect Workplace Opportunity (PPWO); ERISA Industry Committee (ERIC); American Benefits Council. Similarly, some commenters urged the Department to require that any payment that must be included in the regular rate must count towards the overtime salary threshold under 29 CFR part 541. See American Hotel and Lodging Association (AHLA); PPWO; College and University Professional Association for Human Resources (CUPA-HR). The Department did not raise these issues in its proposal, and they are therefore out of scope of this rulemaking.
Some commenters raised issues that are the subject of other on-going rulemaking efforts by the Department. For example, commenters raised concerns regarding the fluctuating workweek regulation at 29 CFR 778.114. See Associated Builders and Contractors; AHLA; Chamber. The Department is currently engaged in rulemaking to revise this specific regulation.[52] Therefore, the Department does not address these issues in this final rule.
Significant issues raised in the comments on the Department's proposal are discussed below, along with the Department's response to those comments.
III. Final Regulatory Provisions
The Department finalizes its proposals to update the regulations in parts 778 and 548 to clarify the Department's interpretation in light of modern compensation and benefits practices. The sections below discuss, in turn, each category of excludable compensation that the Department has addressed in this final rule.
A. Excludable Compensation Under Section 7(e)(2)
Many of the Department's regulatory updates in this final rule clarify the type of compensation that is excludable from the regular rate under FLSA section 7(e)(2). Section 7(e)(2) permits an employer to exclude from the regular rate three distinct categories of payment: First, “payments made for occasional periods when no work is performed due to vacation, holiday, illness, failure of the employer to provide sufficient work, or other similar cause”; second, “reasonable payments for traveling expenses, or other expenses, incurred by an employee in the furtherance of his employer's interests and properly reimbursable by the employer”; and third, “other similar payments to an employee which are not made as compensation for his hours of employment.” [53] In this Preamble, these clauses are referred to as: The “occasional periods when no work is performed” clause; the “reimbursable expenses” clause; and the “other similar payments” clause. The Department's regulations interpreting section 7(e)(2) are contained in §§ 778.216 through 778.224.
1. PAY FOR FORGOING HOLIDAYS OR LEAVE
The initial clause of section 7(e)(2) of the FLSA permits an employer to exclude “payments made for occasional periods when no work is performed due to vacation, holiday, illness, failure of the employer to provide sufficient work, or other similar causes” from the regular rate.[54] Section 778.218 addresses this statutory provision and provides that payments for such time that “are in amounts approximately equivalent to the employee's normal earnings” are not compensation for hours of employment and are therefore excludable from the regular rate.[55]
Section 778.219 addresses a related issue: The exclusion of payments for working on a holiday or forgoing vacation leave, as distinct from the exclusion of payments for using leave.[56] It explains that if an employee who is entitled to “a certain sum as holiday or vacation pay, whether he works or not,” receives additional pay for each hour worked on a holiday or vacation day, the sum allocable as the holiday or vacation pay is excluded from the regular rate.[57] In other words, when an employee works instead of taking a holiday or using vacation leave, and receives pay for both the hours of work performed as well as the holiday or vacation leave that he or she did not take, the amount paid for the forgone holiday or vacation leave may be excluded from the regular rate. In its current form, § 778.219 addresses only pay for forgoing holidays and vacation leave but does not address sums paid for forgoing the use of other forms of leave, such as leave for illness. As explained in the NPRM, WHD has addressed payments for forgoing sick leave in its Field Operations Handbook (FOH). The FOH states that the same rules governing exclusion of payments for unused vacation leave also apply to payments for unused sick leave.[58] Therefore, when “the sum paid for unused sick leave is the approximate equivalent of the employee's normal earnings for a similar period of working time,” such payments are excludable from the regular rate.[59]
To clarify and modernize the regulations, the Department proposed to update § 778.219 to address payments for forgoing both holidays and other forms of leave. The Department noted in the NPRM that it is aware that many employers no longer provide separate categories of leave based on an employee's reason for taking leave—such as sick leave and vacation leave. Instead, employers provide one category of leave, which is commonly called paid time off. The Department explained that it saw no reason to distinguish between the types of leave when determining whether payment for forgoing use of the leave is excludable from the regular rate. Rather, the central issues are whether the amount paid is approximately equivalent to the employee's normal earnings for a similar period of time, and whether the payment is in addition to the employee's normal compensation for hours worked.
Accordingly, the Department proposed to clarify that occasional payments for forgoing the use of leave are treated the same regardless of the type of leave. The Department therefore proposed to revise the title of § 778.219, clarify in § 778.219(a) that payments for all forms of unused leave are treated the same for purposes of determining whether they may be excluded from the regular rate, and add an example concerning payment for forgoing the use of paid time off. The NPRM noted that the proposed changes reflected the Start Printed Page 68741Department's longstanding practice of applying the same principles to payments of unused holiday, vacation, and sick leave.[60] The NPRM stated that the proposed changes would ensure the consistent application of the same principles across differing leave arrangements.[61] The Department also proposed to clarify that payments for forgoing the use of leave are excludable from the regular rate regardless of whether they are paid during the same pay period in which the previously scheduled leave is forgone or during a subsequent pay period as a lump sum.
A number of commenters representing both employers and employees addressed this proposal. See, e.g., Center for Workplace Compliance (CWC); International Municipal Lawyers Association (IMLA); Wood Floor Covering Association (WFCA); National Public Labor Employer Relations Association (NPELRA); Chamber; National Employment Law Project (NELP); Association of Firefighters; the American Federation of Labor and Congress of Industrial Organizations (AFL-CIO). Many supported the changes as proposed. See, e.g., Associated Builders and Contractors; Seyfarth Shaw (Seyfarth); PPWO; Society for Human Resource Management (SHRM); National Automobile Dealers Association (NADA); Society of Independent Gasoline Marketers of America (SIGMA); NDA. SHRM stated that the proposal harmonizes the regulation “with the realities of the modern workplace” by treating all forms of leave in the same manner. NPELRA commented that the proposal “makes common sense.” NELP expressed general agreement with the proposal.
WFCA asked that the regulation specify that the payout of unused leave is still excludable from the regular rate even if the amount of leave accrued is based on the number of hours worked. Rather than accruing leave on a periodic basis (e.g., per pay-period), WFCA noted that many employees accrue leave based on the number of hours worked and that some states require the calculation of leave to be based on hours worked. In response to this comment, the Department notes that neither WHD in its guidance, nor the courts that have addressed this issue, have determined that pay for forgoing leave is excludable or not excludable on the basis of how the paid leave was accrued. Additionally, the Department recognizes that employers may use a variety of bases for determining leave amounts, such as hours or days worked or length of service. Therefore, the Department has concluded that the proposed regulatory language need not be modified as suggested. The method of computation or accrual of paid leave is not determinative. Under the language in the regulation finalized in this rule, the fact that paid leave may be accrued on an hourly basis would not disqualify pay for forgoing such leave from being excludable from the regular rate.
NELP, while generally agreeing with the Department's proposed amendments to § 778.219, requested clarification that regardless of the type of leave, it still must comply with the statutory requirements that it be “occasional” and “similar to vacation, holiday or illness” in order to be excluded from the regular rate. The Department acknowledges NELP's concern but does not believe that any modification to the proposed regulatory text in § 778.219 is necessary. Given the statutory language in section 7(e)(2) that, to be excludable, this form of payment must be made “for occasional periods when no work is performed due to vacation, holiday, illness, . . . or other similar cause,” [62] the Department believes that this is already clear and therefore further clarification in the regulation is unnecessary.
CWC suggested that the Department add an example illustrating the difference between attendance-based incentive bonuses, which must be included in the regular rate, and valid payments for forgoing leave, which can be excluded. The Department declines to modify the regulatory text as suggested. As discussed in the NPRM, in some situations, employers may make payments to encourage attendance at work rather than compensating employees for forgoing the use of leave. Attendance bonuses are typically non-discretionary bonuses that must be included in the regular rate because they are made “pursuant to [a] contract, agreement, or promise causing the employee to expect such payments[.]” [63] An important distinction between an excludable leave buy-back payment and a non-excludable attendance bonus is that an excludable buy-back payment results in the employee no longer having that leave available to use, i.e., the employee's leave balance is diminished by the amount of leave “bought back.” In contrast, where an employee receives an additional payment that does not affect his or her leave balance, or the payment is otherwise tied to factors that are not related to the holiday, vacation, or illness period, such payment may be an attendance bonus that is not excludable from the regular rate. As CWC noted in its comment, the distinction between an excludable payment for forgoing leave and an attendance bonus is usually very fact specific.[64] Because this issue is more appropriately addressed through subregulatory guidance, the Department declines to amend the regulation as suggested. The Department notes, however, that § 778.219(a), as adopted in this final rule, does not affect § 778.211(c), which addresses the exclusion of discretionary bonuses from the regular rate pursuant to FLSA section 7(e)(3)(a).[65]
A few commenters addressed the requirement that the pay for forgoing the leave be approximately equivalent to the employee's normal earnings. See Chamber; NPELRA; Association of Firefighters. The Chamber asserted that there was no statutory basis for requiring that the payment for the forgone leave be approximately equivalent to the employee's normal earnings for the amount of time covered by the forgone leave and therefore argued that this requirement be removed entirely. NPELRA requested that the proposed regulatory language in § 778.219 be modified to permit exclusion of a payment for an employee's unused leave where that Start Printed Page 68742payment is a percentage of the amount that would normally be paid to the employee when using the leave. NPELRA stated that instead of paying 100 cents on the dollar, employers should be permitted to pay a percentage of accrued leave, which is often based on a calculation negotiated with union representatives and takes into account time-in-service and the total amount of sick leave that an employee has accrued. NPELRA provided an example in which an employee with 20 or more years of service would be paid out for his or her unused sick leave at 20 percent if the employee had accrued between 1 and 125 hours of leave, 40 percent for 126 to 255 hours, 60 percent for 256-380 hours, and 80 percent for 381-607 hours. By contrast, Association of Firefighters commented that the Department did not provide any definition of what constitutes an “approximate equivalent” amount and expressed concern that buy-back payments at “sub-premium” rates will now be permitted.
The Department declines to modify the language in proposed § 778.219 to either remove the requirement that payments be made in amounts “approximate[ly] equivalent” or to provide a formulaic definition as to what constitutes an “approximate equivalent.” As an initial matter, the Department notes that this requirement is currently required under § 778.218, which addresses the statutory provision providing for exclusion of payments for occasional periods when no work is performed due to vacation, holiday, and illness. Section 778.218 has long provided that payments for such time that “are in amounts approximately equivalent to the employee's normal earnings,” are not compensation for hours of employment and are therefore excludable from the regular rate.[66] Given that § 778.219's exclusion of pay for forgoing leave is derived from § 778.218, the well-established inclusion of this requirement in the latter warrants its inclusion in the former. Additionally, requiring excludable payments for forgoing leave to be approximately equivalent to the employee's normal earnings helps ensure that the payments are true leave buy-back payments rather than attendance bonuses, which are generally considered to be non-discretionary bonuses that must be included in the regular rate. The example provided by NPELRA, which results in buying back sick leave in amounts that are not approximately equivalent to the employee's normal earnings for a similar period of working time, illustrates why this requirement is necessary. In that example, some of the forgone sick leave is “bought back” at only 20 percent of the dollar value of that leave. For these reasons, the Department has decided to adopt § 778.219 as proposed.
Association of Firefighters and the AFL-CIO contended that the Department's proposal to permit the exclusion of pay for forgoing sick leave is contrary to two appellate cases.[67] First, the court in Chavez relied on § 778.219—and in particular, its explicit reference to pay for vacation leave but lack of reference to pay for sick leave—to conclude that vacation-leave buy-back payments were excludable, but that sick-leave buy-back payments must be included in the regular rate.[68] In characterizing the Department's position on this issue, however, the court did not acknowledge WHD's statement in the FOH that the same rules governing exclusion of payments for unused vacation leave also apply to payments for unused sick leave.[69] Moreover, in citing a 2009 WHD opinion letter,[70] the court did not consider the fact-specific nature of the buy-back program at issue there, which, as discussed above, functioned as an attendance bonus. Nothing in the current language in § 778.219 or the 2009 opinion letter state that a sick-leave buy-back payment can never be excluded from the regular rate. In the second case, Acton, the court neither cited nor discussed the language in section 7(e)(2) that permits exclusion of payments for occasional periods when no work is performed due to vacation, holiday, or illness, or § 778.219, which interprets this statutory provision. Instead, the court mistakenly applied § 778.223 to determine whether buy-back payments were similar to call-back pay, and ultimately concluded that the sick-leave buy back must be included in the regular rate as it constitutes compensation for the general work duty of regular attendance over a significant period of an employee's work tenure.[71] Thus, the court's decision in Acton does not inform the proper interpretation of the statutory exclusion of payments for occasional periods when no work is performed due to vacation, holiday, or illness contained in section 7(e)(2) and explained in § 778.219.[72] Contrary to these two cases, the Department agrees with both the conclusion and underlying reasoning in Balestrieri v. Menlo Park Fire Protection District.[73] There, the court held that buy back payments for annual leave, which included both sick and vacation leave, need not be included in the regular rate. While acknowledging that some sick-leave buy-back programs, such as the one at issue in the 2009 WHD opinion letter, could function like an attendance bonus and therefore require their inclusion in the regular rate, the annual leave that was bought back in Balestrieri did not differentiate between sick leave and vacation leave. As a result, any portion of the annual leave that could be attributed to sick leave did not function as an attendance bonus.[74]
Lastly, IMLA requested that the Department provide an additional example to § 778.219(a) concerning the excludability of “holiday-in-lieu” pay from the regular rate. IMLA notes that some employees, particularly public sector emergency response personnel, work a set schedule without regard to holidays. Due to the nature of their work, such employees may be called upon to forgo a recognized holiday if their schedule requires them to work that day or if an emergency arises. IMLA states that the current regulations permit the excludability of such payments, but that several courts have nevertheless held that similar forms of “holiday-in-lieu” payments must be included in the regular rate.[75]
Current Department regulations support excluding holiday-in-lieu pay from the regular rate. Under 29 CFR 778.219, where an employee forgoes his Start Printed Page 68743or her holiday and works, and is paid for his or her normal work plus an additional amount for the holiday, the additional amount paid for working the holiday is not included in the regular rate. The Department applied this principle in a 2006 opinion letter concluding that holiday-in-lieu pay could be excluded from the regular rate where the employer provided nine “recognized” holidays and two “floating” holidays paid in a lump sum, and on occasion when employees forgo a holiday and work they received both pay for the hours worked and holiday pay.[76] The Department notes that it does not matter whether the employee voluntarily forgoes the holiday to work or is required to work the holiday by the schedule set for the employee. Nothing in this regulation makes the excludability of such payments dependent on the employee having the option to work or not work on the holiday. All that is required for the holiday-in-lieu pay to be excludable is that the employee is paid an amount for the holiday, in addition to being paid for his hours worked on the holiday.[77] In response to IMLA's comments, the Department has added an additional example to § 778.219(a) involving employees who work a set schedule irrespective of holidays to clarify the regulation.
2. EXCLUSION OF COMPENSATION FOR BONA FIDE MEAL PERIODS
Section 778.218 addresses the clause of FLSA section 7(e)(2) concerning payments made for occasional periods when no work is performed and provides that when payments for such time “are in amounts approximately equivalent to the employee's normal earnings,” they are not compensation for hours of employment and may be excluded from the regular rate.[78] Section 778.218(b) states that this clause “deals with the type of absences which are infrequent or sporadic or unpredictable” and “has no relation to regular `absences' such as lunch periods nor to regularly scheduled days of rest.” [79]
Section 778.320 addresses “[h]ours that would not be hours worked if not paid for,” and identifies “time spent in eating meals between working hours” as an example.[80] Section 778.320(b) further states that even when such time is compensated, the parties may agree that the time will not be counted as hours worked.
The Department proposed to remove the reference to “lunch periods” in § 778.218(b) to eliminate any uncertainty about its relation to § 778.320 concerning the excludability of payments for bona fide meal periods from the regular rate. As one court noted, the existing regulations in §§ 778.218 and 778.320 “appear somewhat inconsistent” on the excludability from the regular rate of compensation for bona fide meal periods.[81] In 1986, WHD acknowledged in an opinion letter “that the reference to meal periods in section 778.218(b) of Part 778 may not be compatible with the position which is contained in section 778.320(b),” and indicated that the issue was under review.[82] The Department subsequently clarified in a 1996 opinion letter that pay provided for a bona fide meal period is excludable from the regular rate under § 778.320(b).[83] As explained in the NPRM, while the Department clarified its position in an opinion letter more than 20 years ago, it is nonetheless concerned that the language in § 778.218(b) may cause confusion concerning the excludability of pay for bona fide meal periods. Thus, to remove any ambiguity and to codify its interpretation in regulation, the Department proposed to delete the reference to “lunch periods” from § 778.218(b).
Bona fide meal periods are not considered “hours worked” for purposes of the FLSA's minimum wage or overtime requirements, and employers are not required to pay for such time.[84] The Department proposed changing § 778.320 to clarify that the payment of compensation for bona fide meal periods alone does not convert such time to hours worked unless agreement or actual course of conduct establish that the parties have treated the time as hours worked. The Department explained in the NPRM that, in the Department's enforcement experience, the treatment of bona fide meal breaks is frequently not subject to formal agreement and is often established by informal policy or course of conduct. Payments for such periods need only be included in the regular rate when it appears from all the pertinent facts that the parties have treated compensated bona fide meal periods as hours worked. The NPRM noted that the proposal would clarify the existing requirements and not substantively change either the calculation of the regular rate or the determination of hours worked.
The Department received many comments supporting these changes and no comments opposed to the changes. See, e.g., NDA; Associated Builders and Contractors; NADA; CWC; SHRM; PPWO. Accordingly, the Department adopts the changes to §§ 778.218(b) and 778.320 as proposed.
3. ADDITIONAL EXAMPLES OF “OTHER SIMILAR CAUSES”
As noted above, § 778.218 addresses the clause of FLSA section 7(e)(2) that permits employers to exclude certain payments for occasional periods when no work is performed “due to vacation, holiday, illness, failure of the employer to provide sufficient work, or other similar cause.” [85] Section 778.218(d) lists examples that qualify as “other similar causes,” including “absences due to jury service, reporting to a draft board, attending a funeral of a family member, [and] inability to reach the workplace because of weather condition.”
The Chamber requested that the Department “add paid family medical leave as an example in § 778.218(d), and paid leave for military service; voting; attending child custody or adoption hearings; attending school activities; donating organs, bone marrow, or blood; voluntarily serving as a first responder; and any other paid leave required under state or local laws.” Upon review, the Department believes these are all examples of non-routine absences that fall within the meaning of “other similar causes” in FLSA section 7(e)(2). Accordingly, the Department is adding these causes for absences in the list of examples of “other similar causes.” The Department further believes that attending any funeral, not just the funeral of a family member, is an “other similar cause” under FLSA section 7(e)(2). Therefore, the Department is Start Printed Page 68744deleting “of a family member” from the text of § 778.218(d).
4. REIMBURSABLE EXPENSES
The second clause of section 7(e)(2) excludes from the regular rate “reasonable payments for traveling expenses, or other expenses, incurred by an employee in the furtherance of his employer's interests and properly reimbursable by the employer[.]” [86] Section 778.217 currently states that “[w]here an employee incurs expenses on his employer's behalf or where he is required to expend sums solely by reason of action taken for the convenience of his employer, section 7(e)(2) is applicable to reimbursement for such expenses.” [87] The Department promulgated this section in February 1950.[88]
While § 778.217, in its current form, limits reimbursable expenses to those “solely” in the interest of the employer, the statutory language does not include this limitation. Instead, the FLSA simply excludes all expenses incurred “in the furtherance of [the] employer's interests[,]” [89] and, as explained further below, neither the Department nor the courts have since restricted excludable expenses to only those that “solely” benefit the employer. As explained in the NPRM, the Department is concerned that this single use of the word “solely” in § 778.217 may be interpreted as more restrictive than what the FLSA actually requires. The Department therefore proposed to remove the word “solely” from § 778.217(a) to clarify its interpretation of the reimbursable expenses clause of section 7(e)(2). The Department noted that this proposed clarification was consistent with the other subsections of § 778.217, as well as court rulings and the Department's opinion letters—which have not required that excludable expenses solely benefit the employer.
Section 778.217(d) also discusses expenses that are excludable from the regular rate. The Department explained in the NPRM that this paragraph emphasizes only whether such payments benefit the employer or the employee; it does not require them to “solely” benefit one party or the other. Thus, payments for expenses that are “incurred by the employee on the employer's behalf or for his benefit or convenience” merit exclusion from the regular rate, but reimbursements for expenses “incurred by the employee for his own benefit,” such as “expenses in traveling to and from work, buying lunch, paying rent, and the like,” are not excluded from the regular rate under the “reimbursable expenses” clause of section 7(e)(2).[90]
Similarly, as the NPRM explained, the Department's opinion letters do not analyze whether an expense is incurred solely for the employer's convenience when discussing whether it may be excluded from the regular rate. Instead, the opinion letters analyze simply whether expenses benefit the employer.[91] Furthermore, since 1955, the Department's policy in WHD's FOH has mirrored the statutory requirement that “expenses incurred by an employee in furtherance of his/her employer's interests” may be excluded from the regular rate, regardless of whether they “solely” benefit one party or the other.[92]
In the NPRM, the Department pointed out that, consistent with the Department's practice and guidance, courts have not analyzed whether the expenses at issue were incurred solely for the employer's convenience when determining whether they are excludable from the regular rate. Instead, courts have emphasized the statutory requirement that the expenses need only benefit the employer.[93]
All of the comments regarding this proposal were supportive and agreed that the limitation imposed by the word “solely” in the current regulation could be overly restrictive and is not required by the FLSA. See Associated Builders and Contractors; CWC; Chamber; Fisher Phillips; NADA; PPWO; Seyfarth; SHRM; SIGMA. Two of these commenters also asked that the Department add a new sentence explicitly stating that “business expenses need not be solely or primarily incurred for the employer's benefit.” See Associated Builders and Contractors; Chamber.
The Department has decided to finalize its proposal to remove the word “solely” from § 778.217(a) to better align the regulations with the FLSA. As explained above, the FLSA does not impose a limitation on the proportion of benefit to the employer in order for reimbursed expenses to be excludable. The Department does not believe it is necessary to further add a sentence stating that business expenses need not be “solely or primarily incurred for the employer's benefit” in order to be excludable. The removal of the term “solely” adequately aligns the regulations with the statute.
The Department also proposed to clarify section 7(e)(2)'s requirement that only “reasonable” and “properly reimbursable” expenses may be excluded from the regular rate when reimbursed. Current § 778.217(b)(3) permits employers to exclude from the regular rate “[t]he actual or reasonably approximate amount expended by an employee who is traveling `over the road' on his employer's business, for transportation . . . and living expenses away from home, [or] other [such] travel expenses[.]” Section 778.217(c) cautions that “only the actual or reasonably approximate amount of the expense is excludable from the regular rate. If the amount paid as `reimbursement' is disproportionately large, the excess amount will be included in the regular rate.”
Two commenters asked the Department to clarify that specific reimbursable expenses are excludable from the regular rate. See NADA; AHLA. These requests included “cell phone reimbursement,” “non-mandatory credentialing exam fees,” “organization membership dues,” and reimbursements for the cost of tools. These are clearly not compensation for hours of employment, but instead are expenses taken on by employees for the employer's convenience or benefit. Start Printed Page 68745Because “[t]he actual amount expended by an employee in purchasing . . . tools” is already included in the regulation's illustrations of excludable reimbursements, the Department believes sufficient guidance is available regarding tool reimbursements.[94] However, to provide additional clarity regarding cell phone reimbursement, exam fees, and membership dues, the Department has decided to revise the language of the illustration provided at § 778.217(b)(1) to make clear that these too are excludable reimbursements.
The NPRM proposed additional explanation of what is “reasonable”—and thus not “disproportionately large”—by referring to the Federal Travel Regulation. The Department explained that it believes that the amounts set in the Federal Travel Regulation are not excessive and are easily ascertained, given its “two principal purposes” of “balanc[ing] the need to assure that official travel is conducted in a responsible manner with the need to minimize administrative costs” and “communicat[ing] the resulting policies in a clear manner to Federal agencies and employees.” [95] The Department thus proposed to add regulatory text explaining that a payment for an employee traveling on his or her employer's business is per se reasonable if it is at or beneath the maximum amounts reimbursable or allowed for the same type of expense under the Federal Travel Regulation and meets § 778.217's other requirements. Those other requirements include that the reimbursement be for the “actual or reasonably approximate amount” [96] of the expense, that the expense be incurred on the employer's behalf, and that the expense not vary with hours worked.[97] The proposed regulatory text also clarified that a reimbursement for an employee traveling on his or her employer's business exceeding the Federal Travel Regulation limits is not necessarily unreasonable. As the NPRM explained, a payment may be more than that required “to minimize administrative costs” yet still within the realm of reasonable business and industry norms.
A number of commenters supported the Department's proposal to state in the regulatory text that reimbursements for travel expenses are per se reasonable if they do not exceed the rates in the Federal Travel Regulation. See, e.g., NDA; PPWO; SIGMA; SHRM; Chamber. Several commenters noted that the Federal Travel Regulation rates are below market rate, and that in many cases expenses exceeding that amount may still be reasonable. To address this issue, some commenters recommended that the Department finalize proposed paragraph (c)(3) stating that costs exceeding the Federal Travel Regulation may still be reasonable, and two recommended that the Department develop additional guidance about the Federal Travel Regulations after issuance of the final rule. See AHLA; CWC; Chamber; SIGMA; SHRM. Two commenters noted that many employers use Internal Revenue Service (IRS) guidelines for reimbursement of employee travel expenses, and suggested that the final rule also state that expenses not exceeding the IRS's guidelines for reimbursement of employee travel expenses are per se reasonable. See NDA; PPWO.
The Department has decided to modify the language in proposed § 778.217(c)(2) to state that payments equal to or less than the Federal Travel Regulation rates or the substantiation amounts for travel expenses permitted by the IRS under 26 CFR 1.274-5(g) and (j) are per se reasonable and not disproportionately large.[98] The Department has also decided to finalize the regulatory language in proposed § 778.217(c)(3) noting that § 778.217(c)(2) does not create an inference that amounts in excess of the Federal Travel Regulation rates or the rates set by the IRS on travel expenses are per se unreasonable.[99]
5. OTHER SIMILAR PAYMENTS
Section 7(e) requires “all remuneration for employment” be included in the regular rate, subject to that section's eight listed exclusions. Section 7(e)(2) consists of three clauses, each of which address a distinct category of excludable compensation. As discussed above, the first excludes “payments made for occasional periods when no work is performed due to vacation, holiday, illness, failure of the employer to provide sufficient work, or other similar cause.” The second excludes “reasonable payments for traveling expenses, or other expenses, incurred by an employee in the furtherance of his employer's interests and properly reimbursable by the employer.” The third clause of section 7(e)(2) excludes from the regular rate “other similar payments to an employee which are not made as compensation for his hours of employment.”
As explained in the NPRM, “[o]ther . . . payments” are “similar” to those in the first two clauses of section 7(e)(2) because they are “not made as compensation for [an employee's] hours of employment.” The first two clauses share the essential characteristic of having no connection to the quantity or quality of work performed. The “other similar payments” clause thus excludes payments not tied to an employee's hours worked, services rendered, job performance, or other criteria linked to the quality or quantity of the employee's work.[100]
The NPRM explained that, in a sense, every benefit or payment that an employer gives an employee is Start Printed Page 68746“remuneration for employment.” [101] Certainly benefits like paid vacation or sick leave are seen as such by many employers and employees. But the section 7(e)(2) exclusions make clear that whether or not they are remuneration, they are “not made as compensation for [the employee's] hours of employment” because they have no relationship to the employee's hours worked or services rendered. This interpretation gives meaning to the third clause. It allows employers to provide benefits unconnected to the quality or quantity of work, even if those benefits are remuneration of a sort.
The NPRM further explained that interpreting the third clause as simply a restatement of the “remuneration” requirement would contravene basic principles of statutory interpretation. Such an interpretation would equate the unique phrases “all remuneration for employment” and “compensation for [the employee's] hours of employment,” even though Congress used different words and thus, presumably, meant different things. This is especially so when considering that one phrase uses the word “employment” when the other uses the term “hours of employment.” Such an interpretation would also render the third clause redundant, another disfavored result. And it would be difficult to reconcile with the first clause of section 7(e)(2), in which the payments are clearly remuneration yet excludable from the regular rate.
The NPRM also explained that payments to employees are not excludable under the “other similar payments” clause merely because the payments are not specifically tied to an employee's hours of work.[102] “Other similar payments” cannot be simply wages in another guise. When a payment is a wage supplement, even if not tied directly to employee performance or hours worked, it is still compensation for “hours of employment.” For example, payments such as production bonuses,[103] and the cost of furnished board, lodging, or facilities,[104] which “though not directly attributable to any particular hours of work are, nevertheless, clearly understood to be compensation for services” [105] are not excludable under this provision. Similarly, payments that differ only in form from regular wages by, for instance, being paid in a monthly lump sum or as hardship premiums, are better characterized as wages or bonuses than as “other similar payments” excludable from the regular rate. The other similar payments clause cannot be interpreted so broadly as to “obliterate[ ] the qualifications and limitations” placed on excludable payments specifically addressed in section 7(e)'s various other sections, which could render such limits “superfluous.” [106]
The NPRM stated that the Department's interpretation has considerable support in the case law, citing multiple decisions. First, the Third Circuit held in Minizza v. Stone Container Corp. that two lump sums paid to select employees to induce them to agree to a collective-bargaining agreement were excludable as an “other similar payment” because they were not compensation for hours worked or services rendered.[107] The court interpreted the clause to exclude “payments not tied to hours of compensation, of which payments for idle hours and reimbursements are only two examples.” [108] The court's decision that these payments were not compensation for employment rested in part on the fact that the “eligibility requirements were not meant to serve as compensation for service, but rather to reduce the employers' costs,” but also in part on the fact that “the eligibility terms themselves [for the lump sums] [did] not require specific service”—it did “not matter how many hours an employee worked during that period, nor how many hours he might work in the future.” [109]
Second, the Seventh Circuit espoused a similar understanding in Reich v. Interstate Brands Corp. [110] There, the court held that regular, planned $12 payments to bakers who worked weeks without two consecutive days off could not be excluded from the regular rate under section 7(e)(2). The court reasoned that the payments were materially no different from a higher base rate to compensate the bakers for taking on an unpleasant schedule.[111] “Other similar payments” are different, wrote the court. “The word `similar' . . . refers to other payments that do not depend at all on when or how much work is performed.” [112]
Similarly, the Sixth Circuit has held that pay differentials based on employees' education level, shift differentials, and hazardous pay are compensation for services rendered, unlike payments that “are unrelated to [employees'] compensation for services and hours of service.” [113] Some circuit courts have interpreted the “other similar payments” not to exclude payments that are “compensation for work.” [114] The Department concurs with these courts to the extent that they have used these or similar phrases to capture the idea that the regular rate includes payments tied to work performance or that function as a wage supplement. But insofar as these courts have equated “compensation for work” with “remuneration for employment,” [115] that is difficult to reconcile with the text of the FLSA. As explained above, the FLSA uses two different phrases, “remuneration for employment” and “compensation for hours of employment,” each of which should be given distinct content. And just as importantly, the first clause of section 7(e)(2) excludes vacation and sick leave, which is clearly remunerative; “other similar payments” to employees can be remunerative too.
Accordingly, the NPRM explained, the proposed clarifications would promote a clear yet flexible standard for employers and employees to order their affairs. Payments are “other similar payments” when they do not function as formulaic wage supplements and are not tied to hours worked, services Start Printed Page 68747rendered, job performance, or other criteria linked to the quality or quantity of the employee's work, but are conditioned merely on one being an employee. Conditions not tied to the quality or quantity of work performed, such as a reasonable waiting period for eligibility [116] or the requirement to repay benefits as a remedy for employee misconduct, are permitted. This standard also clarifies that there is space for a variety of creative benefits offerings, and encourages their provision to wide groups of employees instead of reserving them only for FLSA-exempt employees.
Section 778.224 addresses miscellaneous items that are excludable from an employee's regular rate under the “other similar payments” clause of section 7(e)(2) because they are “not made as compensation for . . . hours of employment[.]” [117] Section 778.224(b) currently provides a brief, nonexhaustive set of examples of “other similar payments” excludable from an employee's regular rate: “(1) Sums paid to an employee for the rental of his truck or car[;] (2) Loans or advances made by the employer to the employee[;] [and] (3) The cost to the employer of conveniences furnished to the employee such as parking space, restrooms, lockers, on-the-job medical care and recreational facilities.” [118] The NPRM noted that the Department added this set of examples to the part 778 regulations in 1950,[119] and has not substantively amended them since. The regulation makes clear that “it was not considered feasible” to provide an exhaustive list of excludable “other similar payments” given the “variety of miscellaneous payments [that] are paid by an employer to an employee under peculiar circumstances.” [120]
The Department explained in the NPRM that it continues to believe that providing a comprehensive list of all “other similar payments” excludable under section 7(e)(2)'s third clause is infeasible. Nonetheless, the Department recognized that an updated list would further help employers understand their legal obligations by addressing some of the innovative changes in compensation practices and workplace environments that have occurred since the Department added this set of examples in 1950. Therefore, the Department proposed clarifying in § 778.224(b) that the following items may be excluded from an employee's regular rate under the “other similar payments” clause of section 7(e)(2).
A. SPECIALIST TREATMENT PROVIDED ONSITE; GYM ACCESS, GYM MEMBERSHIPS, AND FITNESS CLASSES; WELLNESS PROGRAMS; DISCOUNTS ON RETAIL GOODS AND SERVICES
The Department proposed clarifying in § 778.224(b)(3) that employers may exclude from the regular rate the cost of providing onsite treatment from specialists such as chiropractors, massage therapists, personal trainers, counselors, Employment Assistance Programs, or physical therapists.[121] As explained in the NPRM, such specialist treatment resembles “on-the-job medical care,” which § 778.224(b)(3) already identifies as an excludable “convenience furnished to the employee.” [122] Employers that provide onsite specialist treatment do so for a variety of reasons, including to raise workplace morale, promote employee health, and reduce healthcare costs.
The Department also proposed clarifying in § 778.224(b)(3) that the cost of providing employees with gym access, gym memberships, and fitness classes, whether onsite or offsite, is excludable from the regular rate.[123] These fitness benefits, the Department explained, resemble “recreational facilities,” which § 778.224(b)(3) already identifies as an excludable convenience provided to employees. According to one survey, a substantial number of employers provided fitness benefits.[124] Employers may provide such conveniences for many reasons, including to raise workplace morale, promote employee health, and reduce healthcare costs.
The Department proposed adding an example in § 778.224(b)(4) to clarify that employers may exclude from the regular rate the cost of providing certain health promotion and disease prevention activities, often known as wellness programs. The NPRM noted that examples of some common wellness programs include health risk assessments, biometric screenings, vaccination clinics (including annual flu vaccinations), nutrition classes, weight loss programs, smoking cessation programs, stress reduction programs, exercise programs, and coaching to help employees meet health goals.[125] Wellness programs are often provided to employees enrolled in an employer-sponsored health insurance plan, but some employers offer wellness programs to employees regardless of their health insurance coverage. The NPRM stated that workplace wellness programs are similar to “on-the-job medical care” and “recreational facilities,” conveniences that the regulations already specify are excludable from an employee's regular rate.[126] Employers may provide such programs to, for example, reduce health care costs, reduce health-related absenteeism, and improve employee health and morale.
The Department also proposed adding an example in § 778.224(b)(5) to confirm that discounts on retail goods and services may be excluded from the regular rate of pay as long as they are not tied to an employee's hours worked or services rendered. The NPRM cited a survey that indicated that many employers provide employees with an option to purchase these types of goods or services at a discounted price relative to their full retail value.[127] Such discounts are commonly available to employees regardless of their quality or quantity of work, and it is solely the employees' choice whether to purchase anything under the discount. When these discounts are available to employees regardless of their hours worked or services rendered, and are not tied to any duties performed, they qualify as “other similar payments” Start Printed Page 68748under section 7(e)(2).[128] The NPRM pointed out that more than 50 years ago, the Department stated that such employee discounts are not included in the regular rate of pay. In a 1962 opinion letter, the Department found that the value of “concessions granted to employees . . . on charges for telephone service” was “not part of wages includible in the regular rate of pay”—in part because “[s]uch concessions appear to be similar to discounts on merchandise offered by many retail establishments to their employees which [the Department] do[es] not regard as wages.” [129] The NPRM explained that discounts like these are not fungible cash but merely a lower price on the employer's offerings. They appeal only to the employees who want to use them and are limited to the offered selection of goods or services. Employees must expend their own funds to avail themselves of the discounts. The discounts are presumably limited in their value, since employers likely do not offer discounts that would materially harm their business. And employers may also place conditions on the discounts to protect their interests by, for instance, requiring that discounted restaurant meals be eaten on the premises to prevent abuse.
The Department received numerous comments in support of these clarifications, with many commenters noting that the additional clarity provided by the additional examples in § 778.224(b) will allow employers to provide these types of benefits to employees more frequently. See, e.g., Chamber; National Association of Health Underwriters (NAHU); HR Policy Association (HR Policy); SHRM; Seyfarth; NFIB. By contrast, a few commenters expressed concerns with this proposed clarification. See, e.g., National Employment Lawyers Association (NELA); NELP. NELA opposed this proposed clarification, suggesting that the Department instead state that such payments “may be excluded from the regular rate only after a case by case analysis using applicable principles.” NELP similarly expressed concern that the added examples created per se categorical exclusions of types of benefits.
The Chamber asked the Department to add the following language to § 778.224(a): “Payments are `similar' when the amount of the payment is not dependent on hours worked, production, or efficiency and when the amount of the payment is unaffected by the quantity or quality of work performed.” The Department agrees that such a statement would provide further clarity and notes that the NPRM defined “other similar payments” in a comparable manner as “payments not tied to an employee's hours worked, services rendered, job performance, credentials, or other criteria linked to the quality or quantity of the employee's work.” [130] Three items in the NPRM's list of criteria not linked to the quality or quantity of work—“hours worked, services rendered, [and] job performance”—closely correspond with “hours worked, production, or efficiency” from the Chamber's proposal. The NPRM also listed “credentials.” But upon further reflection, the Department believes that, unlike the other listed criteria, credentials are not necessarily linked to the quality or quantity of an employee's work.
Additional pay for education credentials is generally connected with work quality or quantity, and therefore not excludable under § 778.224, as “education advancement . . . enhances the quality of an employee's job performance.” [131] However, because the connection between an employee's education credentials and his or her quality or quantity of work may vary, the Department declines to include “credentials” in the regulatory text as an example of a criterion inextricably linked to the quality or quantity of the employee's work.[132] In contrast, hours worked, services rendered, and job performance are necessarily linked to work quality or quantity, and therefore, these are appropriate examples for the regulatory text. Accordingly, the Department has revised § 778.224(a) using language adapted from the NPRM to clarify that “other similar payments” are “payments that do not depend on hours worked, services rendered, job performance, or other criteria that depend on the quality or quantity of the employee's work.” The Department has also revised § 778.224(b)(5) to remove language similar to that added in § 778.224(a) so as to avoid duplicative text.
To provide additional clarity, the Department is adding to § 778.224(a) two examples of conditions identified in the NPRM as being unconnected to the quality or quantity of work performed: “reasonable waiting period for eligibility” and “the requirement to repay benefits as a remedy for employee misconduct.” [133] The Department is also adding an additional example of a condition that is unconnected to the quality or quantity of work to § 778.224(a): “limiting eligibility on the basis of geographic location or job position.” Payments that depends on location—for instance, offering benefits for employees in certain states or cities—are not related to work quality or quantity. Nor do payments that depend on an employee's job position—for instance, offering a signing bonus to engineers but not salespersons.
Relatedly, in response to NELA's and NELP's comments, the Department believes that the addition of the above language to § 778.224(a) makes clear that the proposed examples in § 778.224(b) do not change the existing statutory analysis that the Department uses for determining whether a payment is properly excluded, but instead simply add examples of categories of payments that may be excluded as “other similar payments.” The Department will still look to see if a benefit plan labeled a “wellness plan,” for example, meets the statutory requirements of section 7(e)(2) and corresponding regulatory requirements to determine whether the benefit is tied to hours worked, services rendered, job performance, or other criteria linked to the quality or quantity of the employee's work. The benefit must be conditioned only on being an employee, although conditions unconnected to the quality or quantity of work, such as a reasonable waiting period for eligibility, are permissible. Furthermore, as explained in the NPRM, the benefit cannot be simply wages in another guise. When a payment is a wage supplement, even if not tied directly to employee performance or hours, it is still compensation for “hours of employment.” The additional examples that the Department has added to § 778.224(b) do not change these requirements or the Department's analysis regarding the appropriate treatment of these benefits.
Commenters also identified numerous commonly provided employee perks and asked the Department to clarify whether these items would be excludable under section 7(e)(2). The Start Printed Page 68749Department believes several of the items raised would be excludable and are consistent with the Department's proposal. These include discounts on employer-provided hotel rooms and travel, and non-mandatory credentialing classes. See AHLA; NADA.
AHLA asked the Department to clarify that beverage discounts, food discounts, hotel room discounts, and travel discounts are excludable from the regular rate as an “other similar payment.” In the NPRM, the Department proposed that discounts on employer-provided goods and services are excludable from the regular rate as “other similar payments.” As noted in the NPRM, such discounts are not fungible cash—they offer a lower price on certain offerings and are typically non-transferable. Further, employees have discretion as to whether or not to purchase anything under a discount, thereby receiving the benefit. Provided these beverage discounts, food discounts, hotel room discounts, and travel discounts are not tied to an employee's hours worked, services rendered, or other conditions related to the quality or quantity of work performed, they are excludable from the regular rate under the proposed language in § 778.224(b)(5). NADA asked the Department to clarify that the cost to the employer of paying for non-mandatory credentialing classes for employees is excludable from the regular rate under section 7(e)(2). To be excludable as an “other similar payment” under section 7(e)(2), these non-mandatory credentialing classes may not be compensation for hours worked, services rendered, or other conditions related to the quality or quantity of work performed. The Department believes the language proposed in the NPRM sufficiently addresses this issue, and as a result does not modify its proposal. As such, no further changes to § 778.224 have been made to address these comments.
However, the Department found that modifications would be helpful to add clarity with regards to the exclusion of other items raised by the commenters. For example, some commenters asked the Department to clarify in the final rule that the cost to employers of providing mental health wellness programs and financial wellness programs are excludable along with the cost of providing physical wellness programs. See ERIC; HR Policy. As ERIC noted in its comment, “many employers . . . offer mental health and financial wellness plans as an integrated package with physical wellness plans.” Further, HR Policy's comment stated that such benefits “assist the employee in managing work-life balance . . . and are to the mutual benefit of both the employer and the employee.” The NPRM explained that workplace wellness programs are similar to “on-the-job medical care” and “recreational facilities,” conveniences that the regulations already specify are excludable from an employee's regular rate. The Department finds no meaningful difference between mental health and financial wellness programs and the wellness programs included in the NPRM. Accordingly, the Department clarifies in the final rule that the cost of providing such mental health and financial wellness programs are excludable from the regular rate as an “other similar payment.”
AHLA asked the Department to clarify that parking benefits, in addition to the parking spaces explicitly listed under § 778.224(b)(3)(i), are excludable from the regular rate. Parking benefits provide parking spaces for employees near the business premises of their employer. As explained under § 778.224(a), section 7(e)(2) of the FLSA does not “permit the exclusion from the regular rate of payments such as . . . the furnishing of facilities like board and lodging . . . .” The Department interprets facilities to include certain “transportation furnished employees between their home and work.” [134] Accordingly, the Department has long acknowledged that employer-provided parking spaces are excludable from the regular rate but commuter subsidies are not. It is the Department's view that parking benefits are analogous to an employer-provided parking space, and distinguishable from commuter subsidies. Parking benefits are conveniences provided by an employer so that the employee may have a parking spot near the business premises of the employer. The employee still bears the cost of the actual transportation between their home and work—purchasing and maintaining a vehicle, insurance, and gasoline, etc. To remove ambiguity, the Department modifies its proposal to clarify in the final rule that parking benefits, like parking spaces, are excludable from the regular rate.
Some of the items identified by commenters fit within statutory exclusions other than section 7(e)(2). First, a few commenters asked the Department to clarify whether adoption or surrogacy assistance benefits are excludable from the regular rate. See Chamber; SHRM; Seyfarth; PPWO. The term “adoption assistance” encompasses a wide variety of benefits. These benefits might include financial assistance, legal services, information and referral services, and paid or unpaid leave. Adoption assistance takes many forms, some of which are excludable under other statutory exceptions. Legal services are excludable under section 7(e)(4) to the extent they meet the requirements of § 778.215, and paid leave is excludable under section 7(e)(2) as “occasional periods when no work is performed.” Additionally, the costs of providing adoption assistance in the form of information and referral services or financial assistance for non-legal services may be excluded under section 7(e)(2)'s “other similar payments” clause. These benefits are not tied to an employee's hours worked, services rendered, or other criteria linked to the quality or quantity of work performed. The Department amends its final rule to include this clarification. Unlike adoption assistance, surrogacy assistance tends to consist solely of payment of or reimbursement for medical expenses, typically outside of a medical plan. Such payments may therefore be considered a wage under section 3(m) of the FLSA, which is not excludable from the regular rate.
Some commenters asked the Department to clarify that the cost of providing “snacks,” “office coffee,” “meals,” or “pantry services” are excludable from the regular rate. See HR Policy; National Automatic Merchandising Association (NAMA); Chamber. While commenters suggested these costs are excludable under section 7(e)(2)'s “other similar payments” clause, Department practice and case law already supports exclusion of many of these costs from the regular rate as gifts under section 7(e)(1).
Section 7(e)(1) excludes “sums paid as gifts; payments in the nature of gifts made at Christmas time 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.” As the Department explained in the NPRM, because the first clause, “sums paid as gifts,” is separated from the second clause by a semicolon, the first clause addresses a separate set of excludable benefits from that in the second clause.[135] There may be some overlap between “sums paid as gifts” and “payments in the nature of gifts made at Christmas time, on special occasions, or as a reward for services,” but the categories are not coextensive.
Specifically, sums under the first clause are those “paid as gifts”—that is, paid with the express understanding that they are a gift—as opposed to sums under the second clause, which are not expressly given as a gift, but are nevertheless “in the nature of gifts” because of their timing. The second clause in 7(e)(1) therefore expands the universe of excludable gifts from sums that are obviously “paid as gifts” to include those that are also “in the nature of gifts,” but limits the latter category to those made at Christmas time, on special occasions, or as rewards for service. In either case, however, the payments must not be measured by or dependent on hours worked, production, or efficiency.[136]
The FLSA defines “wage” as “the reasonable cost . . . [of] board, lodging, or other facilities” and thus the cost of providing meals is included in the regular rate.[137] However, if snacks or other food are provided as a gift, or in the nature of a gift, and are “not measured by hours worked, production, or efficiency,” they may be excluded from the regular rate.[138] Courts have specifically found the cost to an employer of providing food items to employees, aside from regularly provided meals, to be excludable from the regular rate as gifts under section 7(e)(1).[139]
When an employer provides snacks or food to employees as a gift, the cost of providing such snacks or food is properly excludable from the regular rate under the first clause of section 7(e)(1). This commonly arises in situations where an employer provides employees with office coffee and snacks, the value of which is minimal. These are provided without regard to hours worked, production, or efficiency, and the cost of such provision is excludable from the regular rate.
Unlike snacks, meals furnished by an employer are generally considered to be wages.[140] However, when a meal is provided by an employer to employees on a special occasion, such as a celebratory pizza lunch, the cost to the employer of providing such food is properly excludable from the regular rate under the second clause of section 7(e)(1). The Department adds language to § 778.212(c) to clarify this in the final rule.[141]
Some commenters also requested clarification that prizes, such as coffee cups and t-shirts, provided in connection with contests or raffles are excludable from the regular rate as “other similar payments” under section 7(e)(2). See SHRM; PPWO; Seyfarth. As with snacks and special occasion meals, the Department believes that the gift provision in section 7(e)(1) already provides for their exclusion from the regular rate as sums “paid as gifts”—that is, paid with the express understanding that they are a gift—the amounts of which are not measured by or dependent on hours worked, production, or efficiency.[142] Because “the subsections of § 7(e) are not mutually exclusive,” [143] there may be areas of overlap between payments that are excludable under section 7(e)(1) and those excludable under section 7(e)(2). Thus, in addition to being excludable as gifts under section 7(e)(1), small items such as coffee mugs or t-shirts provided to an employee may also be properly excludable as an “other similar payment” under section 7(e)(2), so long as its provision does not depend on hours worked, services rendered, job performance, or other criteria that depend on the quality or quantity of the employee's work.
Similarly, several commenters asked the Department to provide guidance on the excludability of sign-on bonuses, suggesting they might be excludable under section 7(e)(2) as an “other similar payment” or under 7(e)(3) as a discretionary bonus. See ERIC; AHLA; Associated Builders and Contractors; NADA; Seyfarth; SHRM; PPWO. Most of these commenters suggested that such payments are excludable under 7(e)(3) as a discretionary bonus. Such comments are addressed in that section of the preamble. ERIC suggested that sign-on bonuses, notwithstanding the inclusion of a clawback provision, are properly excludable under section 7(e)(2)'s “other similar payments” clause and following the Third Circuit's reasoning in Minizza.[144] See also NADA. In that case, the court found that lump sum payments to employees to induce ratification of a collective bargaining agreement were excludable as an “other similar payment” because such payments were unrelated to hours of employment or service.[145] Since a sign-on bonus with no clawback provision is granted before any work is performed, such payment is unrelated to hours worked or services provided and may be excluded under section 7(e)(2).
While still labeled a sign-on bonus, a sign-on bonus with a clawback provision is substantively different from a sign-on bonus that is paid free and clear. As explained by the Sixth Circuit in Featsent v. City of Youngstown, longevity bonuses are dependent on length of service and therefore do not fall within the section 7(e)(2) exception.[146] Since a sign-on bonus with a clawback provision is essentially a longevity bonus, these may not be excluded under section 7(e)(2). However, case law already supports exclusion of certain longevity bonuses under section 7(e)(1) as a gift provided as a reward for future service. The Department's regulations permit exclusion of such bonuses provided that the requirements of § 778.212 are satisfied. A sign-on bonus with no clawback provision is clearly provided on a special occasion as a reward for future service, and is not measured by or dependent on hours worked, Start Printed Page 68751production, or efficiency. A clawback provision that makes such a bonus dependent on length of employment does not necessarily impact its excludability under section 7(e)(1). As courts have noted, longevity payments are properly excludable from the regular rate under 7(e)(1) when employees receive these payments as a reward for tenure, and the payments are not, for example, made pursuant to a city ordinance or policy, or collective bargaining agreement.[147] The Department's existing regulation at § 778.212(c) supports this interpretation, stating that gift payments may “vary with the amount of the salary or regular hourly rate of such employees or according to their length of service with the firm so long as the amounts are not measured by or directly dependent upon hours worked, production, or efficiency.” [148] It follows that “length of service” is not necessarily “directly dependent on hours worked.” As such, the Department does not amend its final rule because it believes this interpretation is already clear. In brief, sign-on bonuses with no clawback provision are excludable from the regular rate; sign-on bonuses with a clawback provision pursuant to collective bargaining agreement (CBA), or city ordinance or policy are included in the regular rate; and sign-on bonuses with a clawback provision not pursuant to a CBA, city ordinance or policy, or other similar document that complies with § 778.212, are excludable from the regular rate.
Several commenters asked the Department to clarify that childcare services or subsidies are excludable from the regular rate. See, e.g., Chamber; Associated Builders and Contractors; HR Policy; CWC. Employer-provided childcare services and subsidies are generally unrelated to the quality or quantity of work performed. However, in the past, the Department has taken a broad view of what is considered to be a “wage” under 3(m) of the FLSA and as such, some payments for childcare services or subsidies may be considered a wage. Payments for childcare services or subsidies are excludable from the regular rate under (e)(2)'s “other similar payments” clause to the extent such payments are not wages under section 3(m).[149] For instance, routinely-provided childcare qualifies as an in-kind reimbursement for “expenses normally incurred by the employee for his own benefit,” which are wages that must be included in the regular rate.[150] However, emergency childcare services provided by employers as an important component of their work-life support packages do not meet this test and may be excluded from the regular rate, if such services are not provided as compensation for hours of employment. Emergency care is provided in the case of unforeseen circumstances, such as when schools or daycares are closed for bad weather or when a child is sick. If these payments are not tied to the quality or quantity of work performed, they are properly excluded from the regular rate under section 7(e)(2)'s “other similar payments” clause.
Finally, some of the items raised by commenters were outside the scope of the Department's proposal, and better addressed in a separate rulemaking. These include meals, relocation stipends,[151] commissions, and programs that issue points redeemable for merchandise. See PPWO; Hancock Estabrook, LLP; SHRM; Seyfarth; Chamber.
B. TUITION
The Department proposed adding an example in § 778.224(b)(5) clarifying that certain tuition programs offered by employers may be excludable from the regular rate. The NPRM noted that some employers today offer discounts for online courses, continuing-education programs, modest tuition-reimbursement programs, programs for repaying educational debt, and the like. Unlike wage supplements, the Department explained, these tuition programs are not fungible, any-purpose cash, but must be directed toward particular educational and training opportunities. These programs are also optional, appeal only to those employees who want to use them, and are directed toward educational and training pursuits outside the employer's workplace. Such tuition programs do not meet the basic necessities of life, such as food, clothing, or shelter. While the educational benefit may result in employees better able to accomplish the employer's objectives, these programs are not directly connected to the employees' day-to-day duties for the employer. The NPRM stated that as long as tuition programs are available to employees regardless of their hours worked or services rendered, and are instead contingent merely on one's being an employee, these programs would qualify as “other similar payments” under section 7(e)(2).[152]
The Department noted in the NPRM that this clarification, permitting tuition programs to be excluded from the regular rate, would not affect the Department's regulations at § 531.32 referencing “meals, dormitory rooms, and tuition furnished by a college to its student employees” as an “other facility.” [153] The college environment is a unique context in which learning, work, and daily living are inextricably connected, tightly knit, and often all provided by the same entity, that being the college.
The Department received numerous comments in support of this clarification. See, e.g., PPWO; NPELRA; SHRM; Associated Builders and Contractors; Chamber; SIGMA. The Department also received a few comments opposed to this clarification as proposed and that suggested modifications to the regulatory language in this section. See, e.g., NELP; NELA; Economic Policy Institute (EPI).
Several commenters requested additional guidance on the types of tuition benefits encompassed by the proposed rule. See ERIC; American Benefits Council; Chamber; CWC; HR Policy; PPWO. Payments for an employee's current coursework, payments for an employee's online coursework, payment for an employee's Start Printed Page 68752family members' tuition, and student loan repayment programs each fit within the exclusion so long as they are not tied to hours worked, services rendered, or other conditions related to quality or quantity of work performed (except for conditions as stated in the rule). Of course, tuition benefits for coursework directly related to the employee's job are excludable under the reimbursements clause of section 7(e)(2).[154]
Some commenters asked the Department to clarify what eligibility limits an employer may place on excludable tuition benefits. See CWC; Seyfarth. For example, Seyfarth commented that many of their clients “employ workers who work for very short periods of time, or very infrequently” and they believe that “a minimum employment requirement is a `basic commonsense condition' ” for some benefits. As explained in the NPRM and proposed regulatory text, while “other similar payments,” such as tuition benefits, must generally not be tied to hours worked, services rendered, job performance, or other criteria linked to the quality or quantity of the employee's work, employers may place “conditions, such as a reasonable waiting period for eligibility” on tuition benefits.[155] Minimum employment requirements would be a permissible condition that would not affect the excludability of the tuition benefit from the regular rate.
Additionally, several commenters asked the Department to clarify whether a tuition benefit payment must be made to the employee, directly to the education or training provider, or through a bona-fide third party service provider, in order to be excludable from the regular rate. See, e.g., CWC; PPWO. So long as the employee is receiving a tuition benefit that is not based on hours worked or services rendered, or other conditions related to the quality or quantity of work performed, it makes no difference whether that benefit is a direct payment to the education provider, to the employee, or through a third-party provider. To make this clear, the Department adds the phrase “whether paid to an employee, an education provider, or a student loan program” to its final rule.
Many commenters asked the Department to clarify that student loan repayment programs are excludable from the regular rate under section 7(e)(2). See ERIC; Chamber; NADA; American Benefits Council; CWC; Seyfarth; SHRM; PPWO; HR Policy. As noted by these commenters, student loan repayment programs take many forms, but the excludability of each plan depends on the facts of that particular plan. As with tuition benefits, student loan repayment plans may be excludable as an “other similar payment” to the extent the payments are not compensation for hours worked or services rendered, or other conditions related to the quality or quantity of work performed.
Some commenters asked the Department to clarify that tuition programs may only be excluded from the regular rate after a case-by-case analysis of whether the tuition program is compensation for work.[156] See NELA; NELP; EPI. As discussed above, the other similar payments clause permits employers to exclude from the regular rate payments to an employee that are “not made as compensation for his hours of employment.” [157] Accordingly, as proposed in the NPRM, the final regulatory text provides that tuition programs may only be excluded from the regular rate provided they are not tied to an employee's hours worked, services rendered, or other conditions related to the quality or quantity of work performed. Because the determination of whether individual tuition programs meet the requirements of section 7(e)(2) and § 778.224 will be based on the specific facts and circumstances of each program, the Department concludes there is no need to revise the proposed regulatory text.
6. SHOW-UP PAY, CALL-BACK PAY, AND PAYMENTS SIMILAR TO CALL-BACK PAY
Section 778.220 excludes from the regular rate “show-up” or “reporting” pay, which is defined as compensation for a specified minimum number of hours at the applicable straight-time or overtime rate on “infrequent or sporadic” occasions in which an employee is not provided with the expected amount of work after reporting as scheduled.[158] Payments for hours actually worked are included in the regular rate; amounts beyond what the employee would receive for the hours worked are excludable.
Section 778.221 addresses “call-back” pay. Call-back pay is additional compensation for calling an employee back to work without prearrangement to perform extra work after the employee's scheduled hours have ended. It is typically paid for a specified number of hours at the applicable straight-time or overtime rate.[159] Call-back pay is treated the same as show-up pay under § 778.220.
Section 778.222 addresses “other payments similar to `call-back' pay,” which are “extra payments made to employees on infrequent and sporadic occasions, for failure to give the employee sufficient notice to report for work on regular days of rest or during hours outside of his regular work schedule,” and “extra payments made, on infrequent and sporadic occasions, solely because the employee has been called back to work before the expiration of a specified number of hours between shifts or tours of duty, sometimes referred to as a `rest period.' ” [160] Such time is treated the same as show-up pay under § 778.220 and call-back pay under § 778.221. Sections 778.220, 778.221, and 778.222 all currently require that the payments be “infrequent and sporadic” to be excludable from the regular rate.
Show-up or reporting pay is paid when the employee is scheduled to work but the employer fails to provide the expected amount of work.[161] Show-up pay is therefore excludable under the first clause of section 7(e)(2), which excludes payments made for “occasional periods” when no work is performed due to the “failure of the employer to provide sufficient work.” [162] Section 778.220 accordingly limits exclusion of such payments to when they are made “on infrequent and sporadic occasions.” [163]
In contrast, call-back pay and other payments similar to call-back pay are not made for periods when the employer fails to provide sufficient Start Printed Page 68753work, but are instead additional payments made to compensate the employee when the employer provides unanticipated work.[164] As such, as explained in the NPRM, these payments do not fall under the first clause of section 7(e)(2). The Department has stated that call-back pay described in § 778.221 and the other payments described in § 778.222 instead fall under the “other similar payments” clause of section 7(e)(2)—which Congress did not restrict to “occasional periods” (unlike the first clause of section 7(e)(2)).[165] The NPRM noted that the FLSA does not require that payments under §§ 778.221 and 778.222 be only “occasional” to be excluded from the regular rate. Accordingly, the Department proposed removing the regulatory restriction that requires the payments discussed in §§ 778.221 and 778.222 to be “infrequent and sporadic.” [166]
Although the Department proposed removing the words “infrequent and sporadic” from §§ 778.221 and 778.222, the Department proposed to include in § 778.222 language that has long been in § 778.221 explaining that payments excluded under these provisions must still be “without prearrangement” in order to be excludable from the regular rate.[167] The proposed rule provided an example of payments made without prearrangement by describing an employer retailer who called in an employee to help clean up the store for 3 hours after an unexpected roof leak, and then again 3 weeks later for 2 hours to cover for a coworker who left work for a family emergency. The proposed rule stated that payments for those instances would be without prearrangement and any call-back pay that exceeded the amount the employee would receive for the hours worked would be excludable. The proposed rule also clarified that when payments under §§ 778.221 and 778.222 are so regular that they, in effect, are prearranged, they are compensation for work and should be included in the regular rate. The proposed rule provided an example of an employer restaurant calling in an employee server for two hours of supposedly emergency help during the busiest part of Saturday evening for 6 weeks out of 2 months in a row, and explained that those payments would essentially be prearranged and all of the call-back pay would be included in the regular rate. The Department further proposed to clarify that the regulations apply regardless of whether the compensation is pursuant to established practice, an employment agreement, or state or local law.
Several commenters supported the Department's proposal to remove the phrase “infrequent and sporadic” from §§ 778.221 and 778.222. See, e.g., CWC; NADA; Chamber. Some of these commenters, however, were concerned that the proposed regulatory text about regularity of payments and prearrangement could create confusion. See PPWO; Seyfarth; SHRM; Chamber. Seyfarth expressed concern that it was unclear “how regularly a payment can be made before it is `essentially prearranged.' ” Other commenters expressed concern that the proposed §§ 778.221 and 778.222 would create confusion about when call-back pay and similar types of payments are frequent enough to be included in the regular rate calculation, and they urged the Department to retain the “infrequent and sporadic” language. See AFL-CIO; EPI; NELA; NELP.
The Department has decided to finalize its proposal to remove the term “infrequent and sporadic” from §§ 778.221 and 778.222. The Department believes that removing the “infrequent and sporadic” language from these sections better aligns the regulations with the third clause of section 7(e)(2) of the FLSA, which does not require that these excludable “other similar payments” be occasional. The Department has also decided to finalize the proposal to add language to § 778.222 stating that payments similar to call-back pay must be made without prearrangement in order to be excludable from the regular rate, which is consistent with long-standing language currently in § 778.221. The Department has decided, however, to clarify in §§ 778.221 and 778.222 that the regularity of payments, alone, does not necessarily establish that such payments are prearranged.
Call-back pay compensates the employee for unanticipated work. A prearranged payment, however, constitutes compensation for work that was anticipated, and so is not excludable call back pay. The key “prearrangement” inquiry is whether the work was anticipated and therefore reasonably could have been scheduled. This is necessarily a fact specific inquiry that must consider a range of circumstantial factors, in addition to regularity. While substantial regularity of call-back pay may be a factor indicating that work was anticipated, regularity does not by itself necessarily establish anticipation regardless of surrounding facts. For instance, the NPRM included an example of prearrangement in which a restaurant employer calls in a server for the busiest part of Saturday evening for six weeks in a two month period. Upon review, the Department believes that such regularity may suggest prearrangement, but consideration of other facts is necessary to draw a conclusion regarding prearrangement. For instance, if the restaurant called in the employee in response to unanticipated emergencies—for instance, the unexpected absence of scheduled servers—on each of the Saturday evenings worked, regularity would not indicate prearrangement.
The NPRM's example also stated that “all the call-back pay would be included in the regular rate.” But regularity over a two month period does not, by itself, establish that the first or second call backs were because there was no regularity in the early portion of that period. Again, consideration of other facts is needed. For instance, call backs in the early portion of the two-month period could have been in response to the unanticipated surge in Saturday evening business, in which cases they would not have been prearranged. But if the facts show that at some point in time the restaurant anticipated that such new business had become the norm, then the subsequent call backs would have been prearranged.
The Department is further concerned that the NPRM's example could be read to imply that prearrangement depends on the same employee being regularly called back. It does not. The key issue is whether the work—i.e., need for an additional server on certain Saturday evenings—was anticipated. If the restaurant had anticipated additional work each evening yet scheduled fewer servers than needed, it would not matter if it had called back a different employee on each of the six evenings to perform the anticipated work. Call back pay would have been prearranged for all six employees.
At bottom, regularity is neither a necessary nor sufficient condition for prearrangement: Frequent call backs over a period of time are not necessarily prearranged, while a single call back could be prearranged. The Department Start Printed Page 68754is concerned that the proposed language regarding regularity in the NPRM might encourage employers and employees to use regularity as a substitute for prearrangement, without adequate regard for other relevant circumstances. Accordingly, the Department is not including that language in §§ 778.221 and 778.222. And the example in § 778.221(a) has been revised to make clear that the “without prearrangement” inquiry should focus on whether the call back work was anticipated.
The preamble to the NPRM also noted that certain states and localities regulate scheduling practices and impose a monetary penalty on employers (which is paid to employees) in situations analogous to those discussed in §§ 778.220, 778.221, and 778.222.[168] These state and local laws include certain penalties that potentially affect regular rate calculations. These include: (1) “reporting pay” for employees who are unable to work their scheduled hours because the employer subtracted hours from a regular shift before or after the employee reports for duty; [169] (2) “clopening” or “right to rest” pay for employees who work the end of one day's shift and the start of the next day's shift with fewer than 10 or 11 hours between the shifts, or who work during a rest period; [170] (3) “predictability pay” for employees who do not receive the requisite notice of a schedule change; [171] and (4) “on-call pay” for employees with a scheduled on-call shift but who are not called in to work.[172] In light of these recent trends in state and local scheduling laws, the Department proposed to clarify the treatment of these penalty payments under the regulations.
The preamble of the NPRM explained that, in the Department's view, reporting pay pursuant to state or local scheduling laws should be analyzed similar to show-up pay under § 778.220 because it is payment for an employer's failure to provide expected work.[173] Compensation for any hours actually worked are included in the regular rate; compensation beyond that may be excluded from the regular rate as payment to compensate the employee for time spent reporting to work and to prevent loss of pay from the employer's failure to provide expected work during regular hours.
“Clopening” or “right to rest” pay under state or local scheduling laws would, the Department explained, be analyzed under § 778.222 (“other payments similar to `call-back' pay”) and would therefore generally be excludable from the regular rate as long as the payments are not regular. The Department would also analyze “predictability pay” penalties under § 778.222, as they are analogous to payments for failure to give an employee sufficient notice to report for work outside of his or her regular work schedule. As with reporting and call-back pay, compensation “over and above the employee's earnings for the hours actually worked at his applicable rate (straight-time or overtime, as the case may be), is considered as a payment that is not made for hours worked,” and is therefore excludable from the regular rate.[174]
Finally, the Department explained that “on-call pay” scheduling penalties would be analyzed under § 778.223, which is entitled “[p]ay for non-productive hours distinguished.” [175] Under this regulation, the Department may require payment for “on-call” time to be included in the regular rate when such payments are “compensation for performing a duty involved in the employee's job.” [176]
Several commenters agreed with the Department's explanation of the proper treatment of state and local scheduling laws under §§ 778.220, 778.222, and 778.223. See, e.g., Bloomin' Brands; SHRM; NADA; CWC; Seyfarth. CWC agreed with the Department's discussion analyzing common state and local scheduling laws under §§ 778.220, 778.221, and 778.222, but suggested that they be discussed in the regulatory text instead of only in the preamble, or that the Department issue subregulatory guidance, such as a Fact Sheet, on this topic.
The Department has accepted the suggestion to add language about certain types of state and local scheduling laws to the regulatory text in §§ 778.220, 778.222, and 778.223. Specifically, the Department has added paragraph (c) to § 778.220 explaining that an employer may exclude payments mandated by state or local scheduling laws for occasions when the employee reports to work but is not provided with the expected amount of work if such payments are not for hours worked and are paid on an infrequent or sporadic basis. As in current paragraph (a), new paragraph (c) makes clear that such payments cannot be credited toward statutory overtime compensation due. The Department is also updating paragraph (b) of § 778.220 in a non-substantive way by raising the wage of the employee in the example from $5 an hour—which is below the current minimum wage—to $12 an hour.
Specifically, the Department has further added a sentence to § 778.222 generally defining the types of excludable payments that may be considered “similar to `call-back' pay,” and noted that such similar payments may include those made pursuant to state and local scheduling laws. The Department also added to § 778.222 examples of “clopening” or “right to rest” pay and “predictability pay” mandated by state or local law as payments similar to call-back pay. Finally, the Department is revising § 778.223 to explain that the principle that “on call” pay is “compensation for performing a duty involved in the employee's job and is not a type of excludable pay under section 7(e)(2),” applies with respect to “on call” pay mandated by state or local law.
B. Discretionary Bonuses Under Section 7(e)(3)
Section 7(e)(3)(a) of the FLSA excludes from the regular rate “sums paid in recognition of services performed” 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 employees to expect such payments regularly.” [177] Section 778.211 of the Start Printed Page 68755regulations implements this exclusion and provides additional details concerning the types of bonuses that qualify for this exclusion. In the NPRM, the Department proposed to elaborate on the types of bonuses that are and that are not discretionary in § 778.211 to add clarity for employers and employees.
The Department proposed modifying language in § 778.211(c) and adding a new paragraph (d) to clarify that, under longstanding principles, neither the label assigned to a bonus nor the reason it was paid conclusively determine whether it is discretionary under section 7(e)(3).[178] The Department explained in the NPRM that, while attendance, production, work quality, and longevity bonuses, as those terms are commonly used, are usually paid pursuant to a prior contract, agreement, or promise causing the employee to expect such payments regularly, and therefore are non-discretionary bonuses that must be included in the regular rate, there may be instances when a bonus that is labelled as one of these types of bonuses is not in fact promised in advance and instead the employer retains discretion as to the fact and amount of the bonus until at or near the end of the period to which the bonus corresponds. The proposed rule modified language in § 778.211(c) and added a new paragraph (d) to § 778.211 to clarify that the label assigned to a bonus is not determinative. Instead, the Department explained, the terms of the statute and the facts specific to the bonus at issue determine whether a bonus is an excludable discretionary bonus. Under section 7(e)(3), a bonus is discretionary and therefore excludable, regardless of what it is labelled or called, if both the fact that the bonus is to be paid and the amount are determined at the sole discretion of the employer at or near the end of the period to which the bonus corresponds and the bonus is not paid pursuant to any prior contract, agreement, or promise causing the employee to expect such payments regularly.
Additionally, the Department proposed to include in new § 778.211(d) examples of bonuses that may be discretionary to supplement the examples of bonuses that commonly are non-discretionary discussed in current § 778.211(c). The NPRM explained that such bonuses may include, for example, employee-of-the-month bonuses, bonuses to employees who made unique or extraordinary efforts which are not awarded according to pre-established criteria, severance bonuses, bonuses for overcoming stressful or difficult challenges, and other similar bonuses for which the fact and amount of payment is in the sole discretion of the employer until at or near the end of the periods to which the bonuses correspond and that are not paid “pursuant to any prior contract, agreement, or promise causing the employee to expect such payments regularly.” [179] The Department explained that it recognized that employers offer many differing types of bonuses to their employees, and that compensation practices will continue to evolve going forward. Finally, the Department invited comments from the public regarding other common types of bonuses that may be discretionary and that should be addressed in § 778.211.
The majority of the commenters supported the proposal's clarification that labels are not determinative. See, e.g., SIGMA; IBC; NADA; Cavanagh Law Firm; HR Policy. IBC commented that the proposal's “focus on the circumstances of the actual payment versus what the payment is called better reflects the reality of business operations as well as the purpose and spirit of the FLSA.” The PPWO and CWC noted that this change is consistent with the Department's longstanding position. HR Policy approved of this proposal because “the proper analysis” is the statutory requirements, not the label applied to the bonus. Other commenters addressed what they perceived as an inconsistency between stating that labels are not determinative and providing examples of bonuses that are excludable discretionary bonuses. PPWO commented that the proposal to include additional examples of discretionary bonuses was inconsistent with the proposal to make clear that labels are not determinative. CWC similarly commented that “the addition of examples that `may be discretionary' is not particularly helpful as it may give a false impression that the types of bonuses listed are usually excludable.” CWC added that more guidance is needed which describes facts that make a bonus more or less likely to be discretionary. By contrast, several commenters requested that the Department include additional examples of excludable discretionary bonuses, such as referral bonuses, and sign-on bonuses. See Cavanagh Law Firm; Chamber; HR Policy; AHLA; Seyfarth, SHRM; Associated Builders and Contractors; PPWO; ERIC; World Floor Covering Association.
After reviewing the comments, the Department adopts the changes to paragraph (c) of § 778.211 and the proposed addition of paragraph (d), with the addition of referral bonuses for employees not primarily engaged in recruiting activities as an example of a bonus that may be discretionary, as suggested by the commenters.
In reviewing the comments, the Department agrees that there is a need for more guidance regarding the facts that may make a bonus discretionary or nondiscretionary. The statute requires all of the following facts to be present for a bonus to be discretionary: (1) The employer has the sole discretion, until at or near the end of the period that corresponds to the bonus, to determine whether to pay the bonus; (2) the employer has the sole discretion, until at or near the end of the period that corresponds to the bonus, to determine the amount of the bonus; and (3) the payment is not made pursuant to any prior contract, agreement, or promise causing employees to expect such payments. In response to comments regarding referral bonuses, sign-on bonuses, and other examples, the Department has addressed each of these below.
Five commenters asked the Department to include employee referral bonuses in the list of bonuses that may be discretionary, finding that such examples “[provide] some clarity to employers” and “[encourage] employers to offer these incentives to their workforce.” See AHLA; HR Policy; Associated Builders and Contractors; Cavanagh Law Firm; Chamber. Cavanaugh Law Firm noted that payment of a referral bonus is “not related to the hours worked by the employee, their productivity, etc.” Such payments are excludable from the regular rate where recruiting activities are not part of the receiving employees' job duties and other conditions are met. Specifically, the Department does not Start Printed Page 68756consider sums “paid to an employee who recruits another to join his employer's work force” to be “part of an employee's remuneration for employment which must be included in [the] regular rate” if (1) participation in the activity is strictly voluntary, (2) the employee's efforts in connection with the activity do not involve significant amounts of time, and (3) the activity is limited to after-hours solicitation among friends, relatives, neighbors, and acquaintances as part of the employee's social affairs.[180] Because it is consistent with the Department's long-standing position, and because it would provide clarity to employers and encourage employers to offer bonuses of this type to employees, the Department includes “referral bonuses for employees not primarily engaged in recruiting activities” as a type of bonus that may be discretionary, so long as it satisfies the statutory test, in its final rule.
Several commenters requested that the Department clarify that sign-on bonuses are excludable as discretionary bonuses. See AHLA; Associated Builders and Contractors; Seyfarth; SHRM; PPWO. ERIC and NADA requested the Department recognize that sign-on bonuses are excludable under 7(e)(2) of the FLSA as an “other similar payment,” which the Department addresses separately in this Preamble. As emphasized by the Department's addition of § 778.211(d), labels are not dispositive in determining whether a bonus is discretionary. Therefore, as with all bonuses, the discretionary nature of a sign-on bonus will be decided by assessing whether it meets the statutory test.
Several commenters requested that the Department address whether other common types of bonuses are excludable as a discretionary bonus. These include year-end bonuses based on company performance where the company retains discretion on whether to pay the bonus until at or near the end of the performance period, bonuses to induce ratification of union agreements, preannounced bonuses, incentive bonuses, safety bonuses, spot bonuses, and quarterly bonuses. See HR Policy; World Floor Covering Association; AHLA; Associated Builders and Contractors; Cavanagh Law Firm. In each of these cases, the Department believes that its finalized regulation provides sufficient clarity by emphasizing that labels are not determinative. Instead, the facts specific to a bonus must be considered against the statutory terms expounded in the final regulation.
Lastly, the Department does not address in this final rule comments concerning bonuses that are outside the scope of this rulemaking, such as a request to modify the regulation on percentage bonuses at § 778.110, or industry-specific bonuses, such as bonuses given to front-desk associates for upselling hotel rooms. See Chamber; AHLA.
C. Excludable Benefits Under Section 7(e)(4)
Section 7(e)(4) of the FLSA excludes from the regular rate “contributions irrevocably made by an employer to a trustee or third person pursuant to a bona fide plan for providing old-age, retirement, life, accident, or health insurance or similar benefits for employees.” [181] Section 778.215(a)(2) explains that, among other things, “[t]he primary purpose of the plan must be to provide systematically for the payment of benefits to employees on account of death, disability, advanced age, retirement, illness, medical expenses, hospitalization, and the like.” The NPRM proposed to add examples of benefits on account of “accident, unemployment, and legal services” to § 778.215(a)(2).
The Department noted in the NPRM that the addition of “accident” is derived directly from section 7(e)(4), which expressly uses the term (even though the current regulations do not). The Department noted that the addition of benefits for unemployment and legal services reflected the Department's conclusion that, although employers may not have commonly offered these benefits when Congress enacted the FLSA in 1938,[182] they are “similar benefits” to those expressly listed in section 7(e)(4). The Department explained that, first, like other specifically enumerated types of benefit plans under section 7(e)(4), these benefit plans typically provide monetary benefits that are “specified or definitely determinable on an actuarial basis.” [183] Second, benefit plans for unemployment or legal services protect employees from events that are rare but statistically predictable and that could otherwise cause significant financial hardship, just as is the case with life insurance, accident insurance, and the catastrophic-protection provisions of life insurance. Third, benefit plans for unemployment or legal services offer financial help when an employee's earnings are (unemployment) or may be (legal services) materially affected, as is the case with the other benefit plans. Employees who retire, reach an older age, or suffer an accident or health issue may be unable to work, or have their ability to work affected.
The Department noted that other characteristics of the various types of plans excludable under section 7(e)(4) may differ, but they still remain “similar” for purposes of the statute. Under the plain text of the statute, excludable plans need not be related to physical health. Retirement benefits are excludable, for instance, even though an employee may choose to retire for reasons wholly unrelated to health. And excludable plans also need not be limited to benefits for rare or even uncommon events. Health insurance, for instance, often pays for everyday medical expenses, and retirement is an event typically planned years in advance. Moreover, the benefits listed in the statute may be subject to various forms of payment. Retirement benefits are often a recurring payment, while accident and health benefits can fluctuate, and a life insurance death benefit can be paid in a lump sum. Therefore, insofar as the proposed additional examples differ among themselves or among other expressly listed benefits by not all being related to physical health, or not all being for rare events, or not all being paid out the same way, those differences do not make the proposed examples not “similar” under the statute. Indeed, such differences are encompassed in the statutory examples themselves.
The Department further explained that these proposed examples, like the examples already provided in regulation and statute, would have to satisfy the other various requirements outlined in § 778.215.[184] The Department noted that these additions would simply help clarify that such plans are not categorically barred from qualifying for exclusion under section 7(e)(4). The Department solicited comments and data on the prevalence and nature of these types of programs and on whether Start Printed Page 68757there are other similar benefit plans that should be expressly included as examples.
The Department received several comments supporting the proposed changes to § 778.215(a)(2) and no comments opposed to the changes. See, e.g., SHRM; Associated General Contractors of America (AGC); PPWO; Seyfarth; NADA. Some of these commenters requested that the Department consider including additional examples of benefits. NADA, for instance, stated that it “supports an expansion of the non-exclusive list but urges the DOL to indicate that cash payments in lieu of plan participation also may be excluded.” The American Benefits Council suggested the Department add that employer-provided “programs for repaying educational debt” may be excludable under section 7(e)(4). See also ERIC. Upon review, the Department does not believe it would be appropriate to further expand the list of example benefits in § 778.215(a)(2) to include repaying an employee's accumulated educational debt or cash payments in lieu of plan participation.
An employee benefit plan satisfies the “primary purpose” requirement under § 778.215(a)(2) if it provides a “similar benefit” to the expressly listed benefits in FLSA section 7(e)(4)—i.e., “old-age, retirement, life, accident, or health insurance.” The expressly listed benefits are similar to one another in that they all provide assistance in preparation for a future expense. As explained in the NPRM, such “similar benefits” include providing accident, unemployment, and legal services [185] that protect employees from rare but statistically predictable events that could otherwise cause significant financial hardship or expense.[186] “Similar benefits” also include assistance in preparation for common and predictable events—e.g., retirement. Or even inevitable events—e.g., old age. But a common thread remains: the benefit must help the employee prepare for an event that may result in significant future financial hardship or expense. By contrast, accumulated educational debt represents an expense that an employee would have incurred in the past. As such, repayment of past debt is not similar to the future-oriented benefits expressly listed in section 7(e)(4). Nor are cash payments in lieu of plan participation, as cash is not limited to paying for future expenses.[187] To provide further clarification on this matter, the Department is revising § 778.215(a)(2) to codify the future-expense requirement on “similar benefits.” Specifically, the Department is replacing “or the like” with “or other events that could cause significant future financial hardship or expense.”
The NPRM also proposed to revise § 778.215(b), which currently provides that where the benefit plan or trust has been approved by the Bureau of Internal Revenue as satisfying the requirements of section 401(a) of the Internal Revenue Code in the absence of evidence to the contrary, the plan or trust will be considered to meet the conditions specified in § 778.215(a)(1), (4), and (5). In particular, the NPRM proposed to modernize this provision by replacing “Bureau of Internal Revenue”—a term that has not been used since 1953—with “Internal Revenue Service.” [188]
Commenters suggested several additional ways for the Department to modernize § 778.215(b). Some commenters informed the Department that the recent elimination of significant aspects of the IRS's determination letter program results in fewer “approvals” from the IRS. American Benefits Council; Chamber. The American Benefits Council suggested that the Department replace “approved by the Internal Revenue Service as satisfying the requirements of section 401(a)” with “designed to meet the requirements of section 401(a).”
Commenters also requested that the Department expand the coverage of § 778.215(b) to presume that more benefit plans meet the requirements of § 778.215(a). The American Benefits Council, for instance, suggested that the Department deem section 401(a) plans to meet all five conditions required under § 778.215(a), rather than just the conditions in paragraphs (a)(1), (4), and (5). The American Benefits Council further requested that the Department “expand . . . § 778.215(b) to other common types of retirement plans, namely [Internal Revenue] Code section 403(a), 403(b), 408(k), 408(p), and governmental 457(b) plans.” Other commenters requested that the Department “amend 29 CFR 778.215(b) to provide an exemption for all . . . employee welfare benefit and employee pension benefit plans governed by ERISA[.]” Chamber, see also ERIC. Some commenters who supported the proposed changes also suggested the Department clarify that certain types of ERISA employee benefit plans are excludable under section 7(e)(4) of the Act. For example, WageWorks requested that the Department clarify that “amounts that an employer contributes to an employee's HRA are to be excluded . . . just like the benefits provided under any other employer provided health plan.” And the Associated Builders and Contractors and NAM requested the Department clarify that employer contributions to multiple employer plans, e.g., Association Retirement Plans or Association Health Plans (AHPs), are excludable.
After careful consideration, the Department has concluded that it would be appropriate to expand the scope of § 778.215(b) in three ways. First, the Department agrees with commenters that § 778.215(b) should be revised in light of the IRS's recent decision to change its determination letter procedures. The IRS maintains a program under which plan sponsors can obtain a determination letter that approves a plan as complying with requirements under section 401(a) or 403(a) of the Internal Revenue Code. In addition, the IRS issues approval letters for pre-approved plans, which can be relied upon by plan sponsors, that a plan meets the requirements of section 401(a) or 403(b) of the Internal Revenue Code. But, as of 2017, sponsors of individually designed plans generally may request a determination letter only for initial qualification or upon plan termination.[189] This change may prevent some sponsors that amend an existing plan from receiving a determination letter approving the amended plan. Thus, under the current § 778.215(b), some sponsors that amend a qualified plan are unable to obtain a determination letter that the plan, as amended, satisfies the requirements of section 401(a) of the Internal Revenue Code. In order to reflect these changes to the IRS's determination letter program, the Department is revising the provision to state that, absent evidence to the contrary, a plan “maintained pursuant to a written document that the plan sponsor reasonably believes satisfies the requirements” of section 401(a) of the Internal Revenue Code will Start Printed Page 68758be considered to meet certain requirements of § 778.215(a).
Second, the Department agrees with commenters that plans meeting the requirements of section 401(a) of the Internal Revenue Code should be deemed to comply with § 778.215(a)(2). A section 401(a) plan is an employer-sponsored tax-advantaged plan in which the employer, the employee, or both may contribute funds for use in retirement. Treasury regulations state that a section 401(a) pension plan must provide “for the payment of definitely determinable benefits to [an employer's] employees over a period of years, usually for life, after retirement.” [190] In addition, a retirement plan that is a profit-sharing plan must provide “for distributing the funds accumulated under the plan after a fixed number of years, the attainment of a stated age, or upon the prior occurrence of some event such as layoff, illness, disability, retirement, death, or severance of employment.” [191] The Internal Revenue Code further generally subjects early distributions to a 10 percent additional tax unless the plan participant has reached age 591/2, dies, becomes disabled, or meets certain other exceptions.[192] The Treasury regulations' definition of pension plan, the conditions on distributions from profit-sharing plans, and the additional 10 percent tax on early distributions ensure plan assets are used for retirement or another permitted benefit under § 778.215(a)(2). The Department is therefore revising § 778.215(b) to state that a section 401(a) plan may be presumed to satisfy § 778.215(a)(2), in addition to § 778.215(a)(1), (4), and (5). The Department notes that section 401(k) plans, which came into existence in 1978 and have become popular among private employers, are a type of section 401(a) plan that uses a qualified cash or deferred arrangement to provide retirement funds.[193] Accordingly, a section 401(k) plan is a section 401(a) plan and therefore enjoys the same presumptions as a section 401(a) plan.
However, the Department does not believe section 401(a) profit-sharing plans should be presumed to satisfy the requirement in § 778.215(a)(3) that either benefits must be definitely determinable on an actuarial basis or there must be a definite formula to determine both the employer's contribution amount and the benefits for each employee participating in the plan. Although Treasury regulations provide that benefits under a pension plan must be definitely determinable,[194] Treasury regulations require that section 401(a) profit-sharing and stock bonus plans have “a definite predetermined formula to allocating the contributions made to the plan among the participants.” [195] For section 401(a) profit-sharing and stock bonus plans, there is no requirement that there be a definite formula to determining the amount to be contributed by the employer, as required by § 778.215(a)(3).[196] Thus, a section 401(a) profit-sharing or stock bonus plan may grant an employer complete discretion regarding the amount of contributions. The Department's opinion letter dated August 17, 1970, explained that such a plan would not satisfy § 778.215(a)(3).[197] But contributions to such a plan may still be excludable under FLSA section 7(e)(3) as “payments . . . to a bona fide profit-sharing plan or trust.” [198] As the Southern District of California recently explained, a plan need only meet the requirements of a profit-sharing plan under section 7(e)(3) or a bona fide employee benefit plan under section 7(e)(4), but not both, in order for contributions thereto to be excludable.[199]
Third, the Department is extending the presumption of satisfaction under § 778.215(b) to plans that meet the requirements of section 403(a), 403(b), 408(k) or 408(p) of the Internal Revenue Code and to governmental plans that satisfy the requirements of section 457(b) of the Internal Revenue Code (governmental section 457(b) plans). In contrast to section 401(a) plans, section 403(a) plans are employer-sponsored retirement plans that are funded through annuity contracts rather than trusts,[200] and section 403(b) plans are funded through annuity contracts or custodial accounts.[201] Section 408(k) plans—also called Simplified Employee Pension (SEP) plans—are employer-sponsored retirement plans that allow employers to make tax-favored contributions to an employee's Individual Retirement Account or Annuity (IRA).[202] Section 408(p) plans—also called SIMPLE (Savings Incentive Match Plan for Employees) IRA plans—are plans established and maintained by a small business on behalf of its employees.[203] The employer generally is required to contribute to each eligible employee's SIMPLE IRA every year, while employees may also contribute. Finally, governmental section 457(b) plans are tax-advantaged retirement saving accounts available to employees of state and local governments.[204]
Sections 403(a), 403(b), 408(k), and 408(p) plans and governmental section 457(b) plans are all established and maintained by an employer and therefore satisfy the “adopted by the employer” requirement of § 778.215(a)(1). All five types of plans are designed to provide retirement and advanced age benefits by offering tax-favored treatment of plan contributions. Thus, these plans satisfy § 778.215(a)(2). A section 403(a) plan's assets must be placed in an annuity contract provided through a third-party insurer,[205] and a section 403(b) plan's assets must be placed in such an annuity contract or in a custodial account invested in regulated investment company stock (mutual fund).[206] Employer Start Printed Page 68759contributions made under SEP and SIMPLE IRA plans must be paid into each eligible employee's IRA, which is maintained by a financial institution that serves as the trustee of the employee's retirement assets.[207] And “[g]overnmental 457(b) plans must be funded, with assets held in trust for the benefit of employees.” [208] Thus, all five types of plans also satisfy the § 778.215(a)(4) requirement that “[t]he employer's contributions must be paid irrevocably to a trustee or third person pursuant to an insurance agreement, trust or other funded arrangement.”
Section 778.215(a)(5) requires that employer contributions to a plan be used in furtherance of a benefit under FLSA section 7(e)(4), except that incidental cash distributions for other purposes are permitted. Section 403(a) plans are subject to a 10 percent additional tax on early distributions and the minimum distribution requirements under section 401(a)(9) of the Internal Revenue Code. A section 403(b) plan generally permits an employee to withdraw funds only if he or she (1) reaches age 591/2, (2) separates from employment, (3) becomes disabled, (4) dies, (5) encounters a financial hardship, or (6) is called up to active duty military service.[209] The first four conditions correspond to benefits listed in § 778.215(a)(2)—i.e., advanced age, retirement, disability, and death—and therefore distributions under these conditions are consistent with § 778.215(a)(5). The remaining conditions permitting distribution—financial hardship and active duty service—are narrow. A hardship distribution is permitted only if the participant faces an immediate and heavy financial need that cannot be met with available financial resources, and the distribution amount must be limited to that need (increased by the amount of tax reasonably anticipated to result from the distribution).[210] And an active duty distribution is available only where a reservist or national guardsman is called up for at least 180 days of active duty military service.[211] The Department believes that financial hardship and active duty distributions are consistent with the incidental-payment requirements of § 778.215(a)(5). Indeed, such distributions are also permitted under certain section 401(a) plans, which currently are presumed to satisfy § 778.215(a)(5). Accordingly, section 403(a) and section 403(b) plans may be presumed to satisfy § 778.215(a)(5).
Section 457(d)(1)(A) of the Internal Revenue Code permits early distribution from a 457(b) plan only if the participant “attains age 701/2,” “has a severance from employment,” or “is faced with an unforeseeable emergency.” Thus, the only type of 457(b) distribution that does not serve as an FLSA section 7(e)(4) benefit is an unforeseeable emergency distribution. Treasury regulations define unforeseeable emergency as a severe financial hardship resulting from illness, accident, loss of home, or other similar extraordinary and unforeseeable circumstances.[212] An unforeseeable emergency distribution is not permitted unless the participant's other financial assets are insufficient, and the amount of such distribution must be limited to the needs of the emergency (increased by the amount of tax reasonably anticipated to result from the distribution).[213] The Department believes these restrictions ensure unforeseeable emergency distributions are consistent with the incidental-payment requirements of § 778.215(a)(5) and therefore governmental section 457(b) plans may be presumed to satisfy § 778.215(a)(5).
The funding vehicles for SEP and SIMPLE IRA plans are IRAs, which do not prohibit employees from receiving distributions before reaching retirement age. But to discourage the use of plan funds for purposes other than retirement, the Internal Revenue Code generally imposes an additional 10 percent tax on SEP and SIMPLE IRA distributions before the employee reaches age 591/2 unless the employee dies, becomes disabled, or meets certain other specified exceptions.[214] The Department believes the additional 10 percent tax ensures that early distributions are incidental to retirement benefits, and so these types of plans should be presumed to satisfy the incidental-payment requirement under § 778.215(a)(5).[215]
Based on the above discussion, the Department believes that a retirement plan satisfying section 403(a), 403(b), 408(k), or 408(p) of the Internal Revenue Code, or a governmental section 457(b) plan, should be presumed to satisfy § 778.215(a)(1), (2), (4), and (5). Accordingly, the Department is revising § 778.215(b) to extend that presumption to any plan “maintained pursuant to a written document that the plan sponsor reasonably believes satisfies the requirements of section 401(a), 403(a), 403(b), 408(k), or 408(p) of the Internal Revenue Code, or is sponsored by a government employer that reasonably believes the plan satisfies the requirements of section 457(b) of the Internal Revenue Code.” The Department believes this clarifying revision will make it easier for employers to determine whether employer contributions to an employee retirement plan are excludable from the regular rate under FLSA section 7(e)(4) and would serve “the policy of the Federal Government to expand access to workplace retirement plans for American workers.” [216]
The Department is declining to create a new presumption for employee benefit plans governed by and in compliance with ERISA, as requested by some commenters. See ERIC; Chamber. ERISA requirements appear to overlap with some of the requirements of a bona fide Start Printed Page 68760plan detailed in § 778.215(a)(1)-(5). But compliance with ERISA does not address all requirements for excludability under FLSA section 7(e)(4) and § 778.215(a). For example, ERISA does not require all covered employee benefit plans to have benefits that are determined on an actuarial basis or by a definite formula that sets the employer's contribution amount, as required under § 778.215(a)(3); an ERISA-covered profit-sharing plan may grant the employer complete discretion regarding the amount of contributions.[217] Such a plan would not meet the requirements of § 778.215(a)(3).[218]
Additionally, contributions to an employee benefit plan are excludable under FLSA section 7(e)(4) only if they are “irrevocably made by an employer to a trustee or third person” and § 778.215(a)(4) accordingly requires employer contributions to be “paid irrevocably to a trustee or third person pursuant to an insurance agreement, trust or other funded arrangement.” But ERISA does not uniformly require employers to fund all types of ERISA plans through a trustee or third party. While some ERISA plans are funded through a trust or an insurer, ERISA permits employers to establish self-funded plans that pay benefits out of the employer's general assets, which would not satisfy the requirement of FLSA section 7(e)(4) and § 778.215(a)(4).
For example, a Health Reimbursement Arrangement (HRA) is a group health plan that enables employers to reimburse employees' medical expenses in a tax-favored manner. An HRA may be funded through a trust, in which case it would satisfy the irrevocable-contribution requirement of FLSA section 7(e)(4) and § 778.215(a)(4). But an employer may also structure an HRA using a notional account through which reimbursements are paid out of the employer's general assets. In this type of self-funded HRA, there are no irrevocable contributions to a trust or third party, and therefore, reimbursements by such a plan would not be excludable under FLSA section 7(e)(4).[219] However, the Department believes that benefits from self-funded employee benefit plans—including self-funded HRAs—could be excludable under the “other similar payments” clause of section 7(e)(2) if the availability and amount of benefits do not depend on hours worked, services rendered, or any other criteria that depend on the quality or quantity of an employee's work.[220] Because compliance with ERISA is not a substitute for statutory and regulatory prerequisites for excludability from the regular rate under FLSA section 7(e)(4), the Department does not believe it would be appropriate to create a presumption that employer contributions to ERISA employee benefit plans are excludable. Employers should assess the plan's compliance with the elements set forth in § 778.215(a)(1)-(5) to determine excludability, rather than rely on the plan's compliance with ERISA.
The above principle applies equally with respect to a multiple employer plan.[221] One common type of a multiple employer plan is an Association Retirement Plan—which provides group retirement benefits. A multiple employer plan is treated the same for purposes of this regulation as if it were a single plan: If the plan satisfies the conditions set forth in § 778.215(a)(1)-(5), then employer contributions to the plan would be excludable under FLSA section 7(e)(4).[222]
Some commenters who supported the proposed changes also suggested the Department clarify that other specific benefit plans are excludable under section 7(e)(4) of the Act. For example, ERIC requested that the Department clarify that contributions to Health Saving Accounts (HSA) and Individual Retirement Accounts (IRA) are excludable, and the American Benefits Council asked the Department to clarify that discretionary contributions to retirement plans are excludable. Other commenters asked the same regarding cash payments to employees made in-lieu of receiving health insurance provided through contributions to a cafeteria plan. See IMLA; NADA; Seyfarth; NPELRA. The Department discusses the excludability of each of these types of benefit plan contributions below.
A cafeteria plan is an employer-sponsored plan established under section 125 of the Internal Revenue Code. A cafeteria plan allows employees to choose between using employer contributions to pay for an employer-provided qualified benefit, including premiums for health coverage or contributions to an HSA, or to receive cash payments (or some other taxable benefits).[223] As an employer-sponsored plan that provides for “payment of benefits to employees on account of . . . medical expenses,” a cafeteria plan would generally meet the requirements of § 778.215(a)(1) and (2). And § 778.215(a)(3) and (4) likely are satisfied if employer contributions are determinable or based on a formula, and are irrevocably made to a trust or third party.[224] The key issue is whether a cafeteria plan satisfies § 778.215(a)(5)'s requirement that cash payments to employees must be incidental to the plan's benefits.
The Department's opinion letter dated July 2, 2003, explained that § 778.215(a)(5) recognizes that “[a] bona fide plan may allow incidental cash payments to employees.” [225] Incidental payments must be consistent with the plan's purpose of providing qualifying benefits. And cash payments in excess Start Printed Page 68761of 20 percent of plan contributions are not incidental to the plan's purpose, unless such payments are used for benefits that are the same or similar as those listed in FLSA section 7(e)(4).[226] Notably, this 20 percent limit is not applied on an employee-by-employee basis, but plan-wide. As the 2003 opinion letter explained, a plan-wide limit “is more consistent with the regulatory language which allows `all or a part of the amount' standing to an employee's credit to be paid in cash. . . .” [227] Thus, “a cafeteria plan may qualify as a bona fide benefits plan for purposes of section 7(e)(4) if: (1) No more than 20% of the employer's contribution is paid out in cash; and (2) the cash is paid under circumstances that are consistent with the plan's overall primary purpose of providing benefits.” [228]
However, the Department disagrees with commenters requesting that cash payments in-lieu of plan participation also may be excluded from the regular rate under section 7(e)(4). See NADA; Seyfarth; NPELRA; IMLA. This is because such cash payments are made directly to the employee, and so fail to satisfy the requirement under FLSA section 7(e)(4) that contributions be “made by an employer to a trustee or third person.” [229] Nor are cash-in-lieu of medical benefits generally excludable under the “other similar payments” clause of section 7(e)(2), as the International Municipal Lawyers Association suggests. As explained above, “other similar payments” cannot be wages in another guise. Cash payments in lieu of medical benefits in many cases function essentially as wage supplements. Even though they are not directly tied to hours worked or service rendered, they are typically paid frequently, regularly, and as fungible cash. And it would make little sense for Congress to require employers to provide a bona fide plan to exclude health care benefits under section 7(e)(4) if employers could simply pay cash toward the same purpose and claim exclusion under section 7(e)(2). As the Seventh Circuit has noted, “we hesitate to read § 7(e)(2) as a catch-all, one that obliterates the qualifications and limitations on the other subsections and establishes a principle that all lump-sum payments fall outside the `regular rate,' for then most of the remaining subsections become superfluous.” [230]
IRAs and HSAs are tax-favored savings accounts that provide, respectively, retirement and health benefits. Employer contributions to an IRA or HSA may satisfy § 778.215(a)(1) if they are made pursuant to an arrangement where the employer makes contributions for employees that is communicated to employees. As explained in the above discussion concerning SIMPLE and SEP plans, an IRA encourages retirement savings.[231] And HSA contributions may be distributed on a tax-free basis to pay for certain qualified medical expenses.[232] Thus, employer contributions to IRAs and HSAs satisfy § 778.215(a)(2). If the plan requires the benefits be specified or definitely determinable based on an actuarial basis, or based on a definite formula for determining the amount to be contributed by the employer and for determining the benefits for each of the employees participating in the plan, or based on a formula for determining the amount to be contributed by the employer and the individual benefits which is consistent with the purposes of the plan or trust, then § 778.215(a)(3) is satisfied as well. IRA and HSA accounts must be with a trustee or custodian, and so employer contributions would also satisfy § 778.215(a)(4)'s requirement that employer contributions must be “paid irrevocably to a trustee or third person pursuant to an insurance agreement, trust, or other funded arrangement.” Finally, IRAs and HSAs permit participants to withdraw cash for purposes unrelated to retirement or medical benefits, but participants must pay an additional tax on those withdrawals.[233] The additional tax ensures that any cash payments are incidental to retirement and/or health benefits, and so both types of accounts satisfy the incidental-payment requirement of § 778.215(a)(5). Accordingly, the Department believes employer contributions to an IRA or HSA under these circumstances would be excludable from the regular rate.
Discretionary employer contributions to a retirement plan may also be excludable, provided that the retirement plan otherwise satisfies § 778.215(a)(1), (2), (4), and (5). Many retirement plans, such as section 401(k) profit-sharing plans, grant employers discretion to make additional contributions at the end of a plan year. The Department's opinion letter dated August 17, 1970, explained that § 778.215(a)(3) requires the amounts of such discretionary contributions to be based on a definite formula.[234] A plan that simply provides that “[t]he Board of Directors of the company at its discretion may make a greater or lesser contribution for any plan year” would fall short.[235] But a plan that enables employers to make discretionary contributions based on a formula that “quantifies each variable” and “describes those variables' relation to each other” would satisfy the definite formula requirement.[236]
D. Overtime Premiums Under Sections 7(e)(5)-(7)
FLSA sections 7(e)(5), (6), and (7) permit employers to exclude from the regular rate certain overtime premium payments made for hours of work on special days or in excess or outside of specified daily or weekly standard work periods.[237] More specifically, section 7(e)(5) permits exclusion of premiums for “hours worked in excess of eight in a day or in excess of the maximum workweek applicable to such employee [under section 7(a)] or in excess of the employee's normal working hours or regular working hours, as the case may be[.]” [238] Section 7(e)(6) permits exclusion of premiums “for work by the employee on Saturdays, Sundays, holidays, or regular days of rest, or on the sixth or seventh day of the workweek, where such premium rate is not less than one and one-half times the rate established in good faith for like work performed in nonovertime hours on other days[.]” [239] Section 7(e)(7) permits exclusion of premiums in pursuance of an applicable employment contract or collective-bargaining agreement, for work outside of the hours established in good faith by the contract or agreement as the basic, normal, or regular workday (not exceeding eight hours) or workweek (not exceeding the maximum workweek applicable to such Start Printed Page 68762employee under subsection 7(a), where such premium rate is not less than one and one-half times the rate established in good faith by the contract or agreement for like work performed during such workday or workweek.[240] Additionally, section 7(h)(2) provides that extra compensation of the types described in sections 7(e)(5), (6), and (7) is creditable toward overtime compensation owed under section 7(a).[241] These are the only types of compensation excludable from the regular rate that are also creditable toward overtime compensation.[242]
Sections 778.202, 778.203, 778.205, and 778.207 explain the requirements for excluding from the regular rate the overtime premiums described in sections 7(e)(5) and (6).[243] Sections 778.202 and 778.202(e) refer to extra premium payments paid pursuant to contracts.[244] Similarly, § 778.205 uses an example of an extra premium payment paid pursuant to an employment “agreement,” [245] and § 778.207(a) refers to “contract premium rates[.]” [246]
The Department proposed amending §§ 778.202 and 778.205 to remove references to employment agreements and contracts in those sections to eliminate any confusion that the overtime premiums described in sections 7(e)(5) and (6) may be excluded only under written contracts or agreements. The NPRM explained that these proposed regulatory clarifications were consistent with sections 7(e)(5) and (6) of the FLSA, neither of which requires that the overtime premiums be paid pursuant to a formal employment contract or collective bargaining agreement. Those statutory exclusions contrast with section 7(e)(7), which explicitly requires “an employment contract or collective-bargaining agreement” to exclude premiums “for work outside of the hours established in good faith by the contract or work agreement as the basic, normal, or regular workday (not exceeding eight hours) or workweek[.]” [247] Exclusion of premium payments under sections 7(e)(5) and (6) turns on deviation from the employee's normal work schedule. The NPRM further explained that the proposed removal of the word “contract” from the regulations did not change the fact that, while there need not be a formal contract or agreement under sections 7(e)(5) or (6), there must be a discernable schedule of hours and days worked from which the excess or nonregular hours for which the overtime premiums are paid are distinguishable.[248] Relatedly, the Department also proposed to amend § 778.207 to refer to the “premium payments” instead of “contract premium rates.” The NPRM noted that the proposed change was consistent with the description of the overtime premiums found in § 778.201 and removes any implication that all of the overtime premium payments must be paid pursuant to a formal contract.
The Department noted in the NPRM that, while the regulations at §§ 778.202, 778.205, and 778.207 have, since 1950, referred to employment contracts and agreements when describing the types of overtime premiums excludable under sections 7(e)(5) and (6),[249] the Department has not interpreted the use of the words “contract” or “agreement” to limit excludable overtime premium payments to only those paid pursuant to a formal contract or collective bargaining agreement.[250] The Department has historically evaluated the actual practice of the parties to determine if extra payments are true overtime premiums that are excludable from the regular rate.[251] In the initial publication of part 778 in 1948, for example, the Department emphasized the primacy of “actual practice” over any contractual terms when assessing whether extra payments were true overtime premiums that could be excluded from the regular rate.[252]
The NPRM further noted that, consistent with the Department's practice, most courts have not required employers using the exclusions in sections 7(e)(5) and (6) to establish the existence of any formal contract or agreement with employees.[253] Even apart from sections 7(e)(5) and (6), courts interpreting the FLSA do not generally require that contracts be in writing (unless specifically required by statute), and they likewise emphasize the importance of the employer's actual practices in determining whether a pay practice complies with the FLSA.[254]
A few commenters addressed these proposals. See Fisher Phillips; CWC; Seyfarth; SHRM; NELA; NELP; EPI. While employers and their representatives were generally supportive of the proposed revisions, three employee groups disagreed with the proposal to remove the word “contract” from §§ 778.202 and 778.205. NELP and EPI suggested that instead of eliminating the word “contract,” the Department should instead consider adding additional terms such as “contract, handbook, policy, or explicit agreement or understanding.” Similarly, NELA suggested that the Department replace the word “contract” with the phrase “contract, agreement or understanding.”
In response to the comments received, the Department has adopted the Start Printed Page 68763suggestion to replace the term “employment contracts” in § 778.202 and “agreement of employment” in § 778.205 with “written or unwritten employment contract, agreement, understanding, handbook, policy, or practice.” This language achieves the original objective of clarifying that overtime premiums do not need to be made pursuant to a written contract or agreement to be excluded under these sections, while also recognizing that they must still be paid pursuant to some form of legitimate agreement or understanding.
E. Clarification That Examples in Part 778 Are Not Exclusive
As explained in the NPRM, the Department recognizes that compensation practices can vary significantly and will continue to evolve. In general, the FLSA does not restrict the forms of “remuneration” that an employer may pay—which may include an hourly rate, salary, commission, piece rate, a combination thereof, or any other method—as long as the regular rate is equal to at least the applicable minimum wage and non-exempt employees are paid any overtime owed at one and one-half times the regular rate. While the eight categories of excludable payments enumerated in section 7(e)(1)-(8) are exhaustive,[255] the NPRM proposed to confirm in § 778.1 that, unless otherwise indicated, part 778 does not contain an exhaustive list of permissible or impermissible compensation practices. Rather, it provides examples of regular rate and overtime calculations that, by their terms, may or may not comply with the FLSA, and the types of compensation excludable from regular rate calculations under section 7(e). Because it is impossible to address all of the various compensation and benefits arrangements that may exist between employers and employees, both now and in the future, the NPRM proposed to specify in § 778.1 that the examples set forth in part 778 of the types of payments that are excludable under section 7(e)(1)-(8) are not exhaustive; there may be other types of payments not discussed or used as examples in part 778 that nonetheless qualify as excludable payments under section 7(e)(1)-(8).
The Department received a number of comments on this clarification, all in support. See, e.g., Associated Builders and Contractors; AHLA; Chamber. Two of these commenters requested that the Department clarify that employers may pay via any method without changing the regular rate calculation and asked the Department to identify alternatives to the examples provided in the regulations. See PPWO; SHRM. The Department believes that the proposed language of § 778.1 accomplishes this, stating specifically that “the FLSA does not restrict the forms of `remuneration' that an employer may pay . . . as long as the regular rate is equal to at least the applicable minimum wage and compensation for overtime hours worked is paid at the rate of at least one and one-half times the regular rate.” Furthermore, while the NPRM proposed to update and add examples in part 778, the proposed language of § 778.1(b) makes clear that it is not feasible to address all of the various types of compensation practices that may exist. Proposed § 778.1(b) accordingly clarifies that the examples in part 778 are not an exhaustive list of permissible or impermissible compensation practices under section 7(e) of the Act unless otherwise clearly indicated. Therefore, the Department adopts the changes to § 778.1 as proposed. Additionally, the Department changes the title of § 778.1 and makes non-substantive edits to modernize the introductory statement.
F. Basic Rate Calculations Under Section 7(g)(3)
Section 7(g) of the FLSA identifies three circumstances in which an employer may calculate overtime compensation using a basic rate rather than the regular rate, provided that the basic rate is established by an agreement or understanding between the employer and employee, reached before the performance of the work.[256] The third of these, identified in section 7(g)(3), allows for the establishment of a basic rate of pay when the rate is “authorized by regulation by the Administrator as being substantially equivalent to the average hourly earnings of the employee, exclusive of overtime premiums, in the particular work over a representative period of time[.]” [257] Part 548 addresses the requirements for using such basic rates to compute overtime pay under section 7(g)(3).[258]
Section 548.2 provides ten requirements for using a basic rate when calculating overtime compensation.[259] Section 548.3 discusses six different authorized basic rates that may be used if the criteria in § 548.2 are met.[260] Section 548.300 explains that these basic rates “have been found in use in industry and the Administrator has determined that they are substantially equivalent to the straight-time average hourly earnings of the employee over a representative period of time.” [261] As relevant to this rulemaking, the current regulation at § 548.3 authorizes a basic rate that excludes “additional payments in cash or in kind which, if included in the computation of overtime under the Act, would not increase the total compensation of the employee by more than 50 cents a week on the average for all overtime weeks . . . in the period for which such additional payments are made.” [262] Section 548.305(b) explains that, under § 548.3(e), upon agreement or understanding between an employer and employee, the basic rate may exclude from the computation of overtime “certain incidental payments which have a trivial effect on the overtime compensation due.” [263] This section provides a nonexhaustive list of examples of payments that have such a trivial effect on the overtime compensation due and therefore may be excluded from the basic rate, including “modest housing,” “bonuses or prizes of various sorts,” and compensation “for soliciting or obtaining new business.” [264] Section 548.305 also provides examples with specific amounts of additional payments to illustrate the application of § 548.3(e).[265] The $0.50 amount is also referenced in § 548.400(b). The Department last updated these regulations more than 50 years ago, in 1966.[266]
The Department proposed to update the $0.50 amount in §§ 548.3, 548.305, and 548.400. Rather than provide a specific dollar or cent amount, however, the Department proposed to replace the $0.50 language in these regulations with “40 percent of the applicable hourly minimum wage under section 6(a) of the Act.” The Department explained that Start Printed Page 68764this is the same methodology that the Department used in the past to update the threshold. In 1955, the Department set the threshold for excludable amounts in § 548.3(e) at $0.30—which, at the time, was 40 percent of the hourly minimum wage required under the FLSA ($0.75 per hour).[267] Similarly, in 1966, after the minimum wage increased to $1.25 per hour, the Department correspondingly increased the threshold amount in § 548.3(e) to $0.50—which, again, was 40 percent of the hourly minimum wage at the time.[268] The current minimum wage is $7.25 per hour, and 40 percent of $7.25 is $2.90. To avoid the need for future rulemaking in response to any further minimum wage increases, however, the Department proposed to replace the current $0.50 references in §§ 548.3(e), 548.305, and 548.400(b) with “40 percent of the applicable minimum hourly wage under section 6(a) of the Act.” Relatedly, the Department also proposed to update the examples provided in § 548.305(c), (d), and (f) with updated dollar amounts, and to fix a typographical error in § 548.305(e) by changing the phrase “would not exceed” to “would exceed.” The Department specifically invited comment as to (1) whether the additional payments that are excludable if they would not increase total overtime compensation should be tied to a percentage of the applicable minimum wage under the FLSA, or a percentage of the applicable minimum wage under state or Federal law; and (2) whether 40 percent of the applicable minimum wage is an appropriate threshold, or if this proposed percentage should be increased or decreased.
A few commenters addressed these basic rate proposals. See Chamber; PPWO; SHRM; NPELRA. The Chamber noted with approval that the proposal modernized certain aspects of this regulation while “hewing closely to the Department's historical approach.” It also commented that the proposal to use a percentage of the applicable minimum wage rather than a fixed dollar amount “makes sense.” While generally supportive of the proposal to update this regulation, PPWO and SHRM commented that the 40 percent amount was too low and suggested that the amount be raised to ten dollars or more per week. In response to the Department's question regarding tying the percentage of the applicable minimum wage under the FLSA or under state or Federal law, the Chamber suggested that the final rule reference state law as well as Federal law, commenting that “[w]hether payments count as trivial will rise with the employee's minimum compensation.” NPELRA appreciated the proposal, but noted that very few public employers use section 7(g)(3)'s basic rate calculations and asked that the regulations implementing 7(g)(3) be further amended to take account of the unique work schedules for law enforcement and fire protection personnel and the partial overtime exemption for such personnel in 29 U.S.C. 207(k) of the FLSA. No comments were received that opposed the proposed changes.
In response to the comments received, the Department has finalized the regulations in part 548 as proposed, with a modification to the regulatory text to reference the minimum wage under either the FLSA or state or local law applicable in the jurisdiction in which the employee is employed, whichever is higher. The Department agrees with the Chamber that the proper measure of whether these additional payments may be excluded from the basic rate calculation should be based on the higher state or local minimum wage. While the Chamber did not specifically reference local minimum wage laws, the rationale for including state laws setting a higher minimum wage is equally applicable to local laws setting a minimum wage higher than the FLSA minimum wage. Therefore, the final rule references the minimum wage under either the FLSA or state or local law applicable in the jurisdiction in which the employee is employed, whichever is higher. The Department continues to believe that 40 percent of the applicable minimum wage, the ratio that the Department has historically used for this regulation, is the proper threshold for exclusion of incidental payments from the basic rate and therefore declines to adopt the suggestion to raise the amount to ten dollars or more per week. The Department also declines to modify these regulations to account for the partial overtime exemption for employees engaged in law enforcement and fire protection because such a request is outside of the scope of the Department's proposal.
Several commenters asked the Department for clearer guidance regarding treatment of furnished meals under the regular rate. See PPWO; HR Policy Association; Chamber. While the cost of meals provided by an employer must be included in the regular rate,[269] where an employer is paying its employees pursuant to an authorized basic rate under section 7(g)(3) of the FLSA and that section's implementing regulations in part 548, the cost of a single meal per workday provided by an employer need not be included in the basic rate.[270] Nonetheless, the Department recognizes there is an apparent tension between its authorized basic rate regulations, which allow for the exclusion from overtime calculations of a customarily furnished employer-provided single daily meal,[271] and section 3(m), which indicates that employer-provided meals are wages that must be included in overtime calculations.[272] As stated in the basic rate regulations published in 1956 after notice and comment, an employer may, when calculating overtime compensation due, exclude from the basic rate the cost of providing one free daily meal to employees upon agreement between the employer and said employees. The regulations explain this authorization is based on “the Administrator's experience that the amount of additional overtime compensation involved in such cases is trivial and does not justify the bookkeeping required in computing it.” [273] This remains true today. While there may be tension between section 3(m) and the part 548 authorized basic rate regulations with regards to exclusion of meals from overtime calculations upon agreement of the employer and employees, part 531 is outside the scope of this rulemaking and thus no changes will be made at this time.
IV. Paperwork Reduction Act
The Paperwork Reduction Act of 1995 (PRA), 44 U.S.C. 3501 et seq., and its attendant regulations, 5 CFR part 1320, require the Department to consider the agency's need for its information collections and their practical utility, the impact of paperwork and other information collection burdens imposed Start Printed Page 68765on the public, and how to minimize those burdens. This final rule does not require a collection of information subject to approval by the Office of Management and Budget (OMB) under the PRA, or affect any existing collections of information. The Department did not receive any comments on this determination.
V. Executive Order 12866, Regulatory Planning and Review; and Executive Order 13563, Improved Regulation and Regulatory Review
A. Introduction
Under E.O. 12866, OMB's Office of Information and Regulatory Affairs (OIRA) determines whether a regulatory action is significant and, therefore, subject to the requirements of the E.O. and OMB review.[274] Section 3(f) of E.O. 12866 defines a “significant regulatory action” as an action that is likely to result in a rule that: (1) Has an annual effect on the economy of $100 million or more, or adversely affects in a material way a sector of the economy, productivity, competition, jobs, the environment, public health or safety, or state, local, or tribal governments or communities (also referred to as economically significant); (2) creates serious inconsistency or otherwise interferes with an action taken or planned by another agency; (3) materially alters the budgetary impacts of entitlement grants, user fees, or loan programs, or the rights and obligations of recipients thereof; or (4) raises novel legal or policy issues arising out of legal mandates, the President's priorities, or the principles set forth in the E.O. OIRA has determined that this rule is significant under section 3(f) of E.O. 12866.
E.O. 13563 directs agencies to propose or adopt a regulation only upon a reasoned determination that its benefits justify its costs; that it is tailored to impose the least burden on society, consistent with achieving the regulatory objectives; and that, in choosing among alternative regulatory approaches, the agency has selected the approaches that maximize net benefits. E.O. 13563 recognizes that some benefits are difficult to quantify and provides that, when appropriate and permitted by law, agencies may consider and discuss qualitatively values that are difficult or impossible to quantify, including equity, human dignity, fairness, and distributive impacts.
B. Economic Analysis
This economic analysis provides a quantitative analysis of regulatory familiarization costs attributable to the final rule and a qualitative analysis of other potential benefits, cost savings, and transfers. This includes a discussion of benefits resulting from reduced litigation. As described above, this rule clarifies existing regulations for employees and employers in the 21st-century workplace with modern forms of compensation and benefits. The Department believes that these updates will provide clarity and flexibility for employers interested in providing such benefits to their employees.
1. OVERVIEW OF CHANGES
This final rule makes several changes to the existing regulatory language in 29 CFR part 778 to update and clarify the FLSA's regular rate requirements, and makes a change to 29 CFR part 548 addressing a “basic rate” that can be used to calculate overtime compensation under section 7(g)(3) of the FLSA when specific conditions are met. Specifically, this final rule includes the following:
Clarification in § 778.219 that payments for unused paid leave, including paid sick leave, may be excluded from an employee's regular rate of pay;
Clarification in §§ 778.218(b) and 778.320 that pay for time that would not otherwise qualify as “hours worked,” including bona fide meal periods, may be excluded from an employee's regular rate unless an agreement or established practice indicates that the parties have treated the time as hours worked;
Clarification in § 778.217 that reimbursed expenses need not be incurred “solely” for the employer's benefit for the reimbursements to be excludable from an employee's regular rate;
Clarification in § 778.217 that certain reimbursements are per se reasonable and excludable from the regular rate;
Elimination of the restriction in §§ 778.221 and 778.222 that “call-back” pay and other payments similar to call-back pay must be “infrequent and sporadic” to be excludable from an employee's regular rate, while maintaining that such payments must not be prearranged;
Addition of regulatory text in §§ 778.220, 778.222, and 778.223 addressing exclusion from the regular rate of payments to employees pursuant to state and local scheduling laws;
Inclusion of additional examples in § 778.224 of employer provided perks or benefits that may be excluded from an employee's regular rate of pay as “other similar payments”;
Clarification in § 778.215 of the types of benefit plans that are excludable as “similar benefits for employees” under section 7(e)(4) and other additions;
Clarification in §§ 778.202, 778.203, 778.205, and 778.207 that employers do not need a prior contract or agreement with the employee(s) to exclude certain overtime premiums described in sections 7(e)(5) and (6) of the FLSA;
Clarification and examples in § 778.211 of discretionary bonuses that are excludable from an employee's regular rate of pay under section 7(e)(3) of the FLSA;
Adoption of the interpretation that some longevity and sign-on bonuses, when certain requirements are met, qualify as gifts under § 778.212 and may be excludable from the regular rate;
Clarification in § 778.1 that the examples of compensation discussed in part 778 of the types of excludable payments under section 7(e)(1)-(8) are not exhaustive; and
An increase from $0.50 to a weekly amount equivalent to 40 percent of the applicable hourly minimum wage under the FLSA (currently $2.90, or 40 percent of $7.25) or the state or local law applicable in the jurisdiction in which the employee is employed, whichever is higher, the amount by which total compensation would not be affected by the exclusion of certain additional payments when using the “basic rate” to compute overtime provided by § 548.3(e).
To measure potential costs, cost savings, benefits, and transfers relative to a baseline of current practice, the Department has attempted to distinguish between specific components that will change existing requirements, and those that will merely clarify existing requirements. Here, the Department believes that only two of the components listed above constitute changes to existing regulatory requirements: (1) Increasing the threshold for exclusion of certain payments when using the “basic rate” to compute overtime under § 548.3(e), from $0.50 to a weekly amount equivalent to 40 percent of the hourly minimum wage under the FLSA (currently $2.90, or 40 percent of $7.25) or the state or local law applicable in the jurisdiction in which the employee is employed, whichever is higher; and (2) eliminating the restriction in §§ 778.221 and 778.222 that call-back pay and similar payments must be “infrequent and sporadic” to be excludable from the regular rate, while Start Printed Page 68766maintaining that such payments must not be prearranged. Both of these changes are deregulatory in nature.
The Department believes that all of the remaining changes clarify existing requirements. Thus, none of the changes in this final rule will impose any new regulatory requirements, or require any regulated entity (i.e., any employer) to change its conduct to remain in compliance with the law.
2. POTENTIAL COSTS
The only potential costs attributable to this final rule are regulatory familiarization costs. Familiarization costs represent direct costs to businesses associated with reviewing any changes to regulatory requirements caused by a final rule. Familiarization costs do not include recurring compliance costs that regulated entities would incur with or without a rulemaking.[275] The Department calculated regulatory familiarization costs by multiplying the estimated number of firms likely to review the final rule by the estimated time to review the rule and the average hourly compensation of a Compensation, Benefits, and Job Analysis Specialist.
To calculate the cost associated with reviewing the rule, the Department first estimated the number of firms likely to review the final rule.[276] According to the data from the U.S. Census Bureau's Statistics of U.S. Businesses (SUSB), there are a total of 5,954,684 firms in the United States.[277] The SUSB data shows that 3,665,182 firms have four or fewer employees.[278] These small-sized firms are less likely than larger firms to offer perks or benefits similar to those addressed in this rulemaking (e.g., wellness programs, on-site medical or specialty treatment, and so forth) and are typically exempt from legislation mandating paid sick leave or scheduling-related premium pay.[279] Thus, the Department believes that firms with fewer than five employees are unlikely to review this final rule. For the purposes of estimating familiarization costs across all firms, the Department believes that the 2,289,502 firms with five or more employees—approximately 38 percent of all 6.0 million firms—represent a reasonable proxy estimate of the total number of interested firms expected to dedicate time learning about the final rule.
Next, the Department estimated the time interested firms will likely take to review the rule. Because the majority of the changes are merely clarifications of existing regulatory requirements, the Department estimates that it will take an average of approximately 15 minutes for each interested firm to review and understand the changes in the rule. Some firms might spend more than 15 minutes reviewing the final rule, while others might take less time; the Department believes that 15 minutes is a reasonable estimated average for all interested firms.
Finally, the Department estimated the hourly compensation of the employees who will likely review the final rule. The Department assumes that a Compensation, Benefits, and Job Analysis Specialist (Standard Occupation Classification 13-1141), or an employee of similar status and comparable pay, will review the rule at each firm. The mean hourly wage of a Compensation, Benefits, and Job Analysis Specialist is $32.65.[280] The Department adjusted this base wage rate to reflect fringe benefits such as health insurance and retirement benefits, as well as overhead costs such as rent, utilities, and office equipment. The Department used a fringe benefits rate of 46 percent of the base rate and an overhead rate of 17 percent of the base rate, resulting in a fully loaded hourly compensation rate for Compensation, Benefits, and Job Analysis Specialists of $53.22 (= $32.65 + ($32.65 × 46%) + ($32.65 × 17%)).[281] The Department notes that employers have compliance responsibilities under existing regular rate standards, and any changes in responsibilities associated with this final rule may, therefore, be absorbed by existing staff. Consistent with other WHD rulemakings, the Department has used a 17 percent overhead rate in this calculation.
Therefore, regulatory familiarization costs in Year 1 for interested firms are estimated to be $30,461,538 (= 2,289,502 firms × 0.25 hours of review time × $53.22 per hour), which amounts to a 10-year annualized cost of $3,571,022 at a discount rate of 3 percent (which is $1.56 per firm) or $4,337,038 at a discount rate of 7 percent (which is $1.89 per firm).
This final rule will not impose any new requirements on employers or require any affirmative measures for regulated entities to come into compliance; therefore, there are no other costs attributable to this final rule.
3. POTENTIAL COST SAVINGS
The Department believes that this final rule could lead to potential cost savings. The clarifications and updated examples included in this final rule may reduce the amount of time employers spend attempting to understand their obligations under the law. For example, employers interested in providing an employee discount program, a wellness program, or onsite exercise opportunities will know immediately from the language included in § 778.224 that the cost of providing such programs may be excluded from the regular rate, thereby avoiding the need for further research on the issue. In addition, the two updates that constitute changes to the regulations will also achieve cost savings. For example, the Department expects that the changes to the basic rate regulations will permit employers that use a basic rate plan to give employees additional incidental payments without concern about the impact on their overtime obligations. Increasing the amount by which total compensation would not be affected by the exclusion of certain additional payments when using the “basic rate” to compute Start Printed Page 68767overtime will both eliminate avoidable litigation and expand the circumstances in which employers that meet the requirements to use a basic rate may exclude “certain incidental payments which have a trivial effect on the overtime compensation due.”
The Department expects that these cost savings will outweigh regulatory familiarization costs. Unlike familiarization costs, the potential cost savings described in this section will continue into the future, saving employers valuable time and resources.
The Department is unable to provide quantitative estimates for cost savings and other potential effects of the final rule due to a lack of data and uncertainty regarding employer responses to the changes. Employers are not generally required to report to the Department their use of these regulatory provisions, and to the Department's knowledge, there is no publicly available data on items such as employers' use of basic rate calculations to calculate overtime due.
The Department is unable to provide quantitative estimates for other potential effects of the final rule due to a lack of data and uncertainty regarding employer responses. The Department did not receive any public comments providing data or information to quantify cost savings.
4. POTENTIAL BENEFITS
This section analyzes the potential benefits of the rule. The Department is unable to provide quantitative estimates for these potential benefits due to a lack of data and uncertainty regarding potential employer responses to the final rule. The Department does not know, for example, how many employers will begin offering wellness programs or other benefits to their employees as a result of this rule. The Department did not receive any public comments providing data or information to quantify benefits.
Distinct from the potential cost savings described above, the rule will likely yield benefits. The Department expects that the added clarity that this rule provides will encourage some employers to start providing benefits that they may presently refrain from providing due to apprehension about potential overtime consequences. These newly provided benefits might have a positive impact on workplace morale, employee health, employee compensation, and employee retention.
For example, the Department has added “the cost to the employer of providing wellness programs, such as health risk assessments, biometric screenings, vaccination clinics (including annual flu vaccinations), nutrition classes, weight loss programs, smoking cessation programs, stress reduction programs, exercise programs, and coaching to help employees meet health goals” to the list of miscellaneous payments excludable from the regular rate provided in § 778.224(b). If employers know they can offer wellness programs without the threat of potentially protracted class or collective action litigation and without potentially having to track employee participation in these activities for purposes of calculating the regular rate, employers might feel more encouraged to offer such programs. An increase in the provision of wellness programs similar to those described in this rule (e.g., smoking cessation programs, vaccine clinics, and so forth) may improve worker health and reduce healthcare costs.[282] Such improvements benefit both the worker and the employer with added value to each.
The final rule will also provide employers greater flexibility and incentivizes greater creativity in their employee-benefits practices. This room to innovate may help workers and increase retention and productivity by allowing employers the chance to provide unique benefits that their employees want and that improve workers' physical and mental health, work environment, and morale. As noted earlier in this final rule, the Department cannot feasibly list every permissible benefit that employers may provide employers, and employers may create new and desirable benefits in the future. But the Department believes that the changes made here will foster that innovation.
In addition, the Department believes that clarifying the regulations will prevent many avoidable “regular rate” disputes. For example, the omission of unused sick leave in the current version of § 778.219 could be responsible for disputes over whether payments for unused sick leave should be included in the regular rate. Although the Department's amendment to § 778.219 simply reflects the Department's current guidance, the added clarity provided by changing the text of the regulations might prevent future expenses stemming from avoidable workplace disputes. Due to uncertainty regarding the costs and prevalence of FLSA-related settlement agreements, arbitration actions, and state court filings, the Department has only estimated cost savings attributable to an expected reduction in Federal FLSA regular rate lawsuits—which may represent only a fraction of all regular rate litigation.
To estimate the number of Federal lawsuits that the final rule may prevent, the Department first attempted to determine the percentage of FLSA lawsuits that predominantly or exclusively feature a “regular rate” dispute. Here, the Department studied two sets of data. First, the Department examined a randomly selected sample of Federal FLSA court filings from 2014 taken from the U.S. Court's Public Access to Court Electronic Records (PACER). After reviewing each of the 500 FLSA cases in this sample for relevant information, the Department found that 6.8 percent of the cases (34 out of 500) primarily featured a regular rate dispute.[283] To corroborate the PACER data, the Department separately reviewed a sample of 258 Federal court decisions from 2017 involving FLSA collective action certification claims,[284] and found that 3.9 percent of these cases primarily centered around a regular rate dispute (10 out of 258). Considering these two different percentages, the Department takes an approximate average and conservatively assumes that approximately five percent of all FLSA cases primarily or exclusively involve a regular rate dispute.
According to the Transactional Records Access Clearinghouse, 25,605 Federal FLSA lawsuits were filed in Fiscal Years 2015, 2016, and 2017, averaging 8,535 lawsuits per year.[285] Assuming there are approximately 8,535 FLSA lawsuits per year, the Department estimates that about 427 cases, or 5 percent of 8,535, primarily or exclusively involve a regular rate Start Printed Page 68768dispute. Given data limitations, if the Department assumes for purposes of this analysis that this final rule will prevent approximately 10 percent of FLSA cases primarily or exclusively featuring a regular rate dispute then this rule will prevent approximately 43 FLSA regular rate lawsuits per year.[286]
To quantify the expected reduction in FLSA lawsuits, the Department must estimate the average cost of an FLSA lawsuit. Here, the Department examined a selection of 56 FLSA cases concluded between 2012 and 2015 that contained litigation cost information.[287] To calculate average litigation costs associated with these cases, the Department first examined records of court filings in the Westlaw Case Evaluator tool and on PACER to ascertain how much plaintiffs in these cases received for attorney fees, administrative fees, and/or other costs, apart from any monetary damages attributable to the alleged FLSA violations. (The FLSA provides for successful plaintiffs to be awarded reasonable attorney's fees and costs, so this data is available in some FLSA cases.) After determining the plaintiff's total litigation costs for each case, the Department then doubled the figures to account for litigation costs that the defendant employers incurred.[288] According to this analysis, the average litigation cost for FLSA cases concluded between 2012 and 2015 was $654,182 per case.[289] Applying this figure to approximately 43 Federal regular rate cases that this final rule could prevent, the Department estimated that avoided litigation costs resulting from the rule will total approximately $28.1 million per year. Once again, the Department believes this total may underestimate total litigation costs because some FLSA regular rate cases are heard in state court and thus were not captured by PACER; some FLSA regular rate matters are resolved before litigation or by alternative dispute resolution; and some attorneys representing FLSA regular rate plaintiffs may take a contingency fee atop their statutorily awarded fees and costs.
5. POTENTIAL TRANSFERS
Transfer payments occur when income is redistributed from one party to another. The Department has identified two possible transfer payments between employers and employees that could occur due to this final rule, flowing in opposite directions. On the one hand, income might transfer from employers to employees if some employers respond to the new clarity that particular benefits are excludable from the regular rate calculation by newly providing certain payments or benefits they did not previously provide. On the other hand, income might transfer from employees to employers if some employers respond to this rule's new clarity that a particular benefit currently provided is excludable from the regular rate calculation by newly excluding certain payments from their employees' regular rates without changing any other compensation practices. As discussed above, the Department is unable to quantify an estimated net transfer amount to employers or employees due to a lack of data on the kinds of payments employers presently provide, and the inherent uncertainty in predicting how employers will respond to this rule.
SUMMARY
The Department estimates that this rule will result in one-time regulatory familiarization costs of $30.5 million, which will result in a 10-year annualized cost of $3,571,022 at a discount rate of 3 percent or $4,337,038 at a discount rate of 7 percent.
This final rule is an Executive Order (E.O.) 13771 deregulatory action. Although benefits and cost savings could not be quantified, they are expected to exceed costs. In perpetuity, the annualized costs are estimated to be $913,846 using a 3 percent discount rate and $2,132,308 using a 7 percent discount rate.
VI. Regulatory Flexibility Analysis
In accordance with the Regulatory Flexibility Act,[290] the Department examined the regulatory requirements of the rule to determine whether they will have a significant economic impact on a substantial number of small entities. The Department believes that this final rule will achieve long-term cost savings that outweigh initial regulatory familiarization costs.[291] For example, the Department believes that removing ambiguous language and adding updated examples to the FLSA's regular rate regulations should reduce compliance costs and litigation risks that small business entities would otherwise continue to bear.
The Department received one comment from a private citizen pertaining to the economic analysis. The commenter suggested that the regulation may negatively impact job growth by making it difficult for small or new employers to attract and retain talent in a competitive labor market. The commenter therefore requested the Department limit the scope of the regulation to apply only to certain businesses. The Department notes that the final rule is intended to provide clarity and promote compliance with the Act and encourage employers to provide additional innovative benefits without fear of costly litigation. Further, the Act generally requires that covered, nonexempt employees receive overtime pay of at least one and one-half times their regular rate of pay for time worked in excess of 40 hours per week. Coverage criteria of the Act are designated by statute, and therefore outside of the scope of this rulemaking.
In accordance with the Regulatory Flexibility Act, 5 U.S.C. 601 et seq. (as amended), WHD examined the regulatory requirements of the rule to determine if they will have a significant economic impact on a substantial number of small entities. The final rule is expected to add no regulatory burden for employers, whether large or small. Accordingly, the Agency certifies that the final rule will not have a significant economic impact on a substantial number of small entities. The factual basis for this certification is described in the following paragraph.
As discussed above, the Department used data from the U.S. Census Bureau's Statistics of U.S. Businesses (SUSB) to calculate the number of firms likely to review the final rule. The SUSB data show that there are 5,954,684 firms in the U.S., 3,665,182 of which have four or fewer employees.[292] Also, as Start Printed Page 68769discussed above, the Department believes that firms with fewer than five employees are unlikely to review this rule, because these small-sized firms are less likely than larger firms to offer perks or benefits similar to those addressed in this rulemaking (e.g., wellness programs, on-site medical or specialty treatment, and so forth) and are typically exempt from legislation mandating paid sick leave or scheduling-related premium pay.[293] Familiarization costs will therefore be zero for small businesses with fewer than five employees. The Department estimated familiarization costs across all 2,289,502 firms with five or more employees, and found that the estimated annualized familiarization cost per firm is $1.56 annually over ten years at a discount rate of 3 percent and $1.89 annually at a discount rate of 7 percent. This comprises less than 0.002 percent of gross annual revenues for a small business earning $100,000 per year.
VII. Unfunded Mandates Reform Act Analysis
The Unfunded Mandates Reform Act of 1995 (UMRA), 2 U.S.C. 1532, requires that agencies prepare a written statement, which includes an assessment of anticipated costs and benefits, for any Federal mandate that may result in excess of $100 million (adjusted annually for inflation) in expenditures in any one year by state, local, and tribal governments in the aggregate, or by the private sector. While this rulemaking would affect employers in the public and private sectors, it is not expected to result in expenditures greater than $100 million in any one year. Please see Section V for an assessment of anticipated costs and benefits to the private sector.
VIII. Executive Order 13132, Federalism
The Department has reviewed this final rule in accordance with Executive Order 13132 regarding federalism and determined that it does not have federalism implications. The final rule would not have substantial direct effects on the States, on the relationship between the National Government and the States, or on the distribution of power and responsibilities among the various levels of government.
IX. Executive Order 13175, Indian Tribal Governments
This final rule would not have substantial direct effects on one or more Indian tribes, on the relationship between the Federal Government and Indian tribes, or on the distribution of power and responsibilities between the Federal Government and Indian tribes.
List of Subjects in 29 CFR Parts 548 and 778 Wages
Signed at Washington, DC, this 2nd day of December, 2019.
Cheryl M. Stanton,
Administrator, Wage and Hour Division
For the reasons set out in the preamble, the Department of Labor amends title 29 of the Code of Federal Regulations parts 548 and 778 as follows:
PART 548—AUTHORIZATION OF ESTABLISHED BASIC RATES FOR COMPUTING OVERTIME PAY
1. The authority citation for part 548 continues to read as follows:
Authority: Sec. 7. 52 Stat. 1063, as amended; 29 U.S.C. 207, unless otherwise noted.
2. Amend § 548.1 by revising the first sentence to read as follows: § 548.1 Scope and effect of regulations.
The regulations for computing overtime pay under sections 7(g)(1) and 7(g)(2) of the Fair Labor Standards Act of 1938, as amended (“the Act” or “FLSA”), for employees paid on the basis of a piece rate, or at a variety of hourly rates or piece rates, or a combination thereof, are set forth in §§ 778.415 through 778.421. * * *
3. Amend § 548.3 by revising paragraph (e) and removing the parenthetical authority citation at the end of the section to read as follows: § 548.3 Authorized basic rates.
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(e) The rate or rates (not less than the rates required by section 6(a) and (b) of the Act) which may be used under the Act to compute overtime compensation of the employee but excluding additional payments in cash or in kind which, if included in the computation of overtime under the Act, would not increase the total compensation of the employee by more than 40 percent of the applicable hourly minimum wage under either section 6(a) of the Act or the state or local law applicable in the jurisdiction in which the employee is employed, whichever is higher, per week on the average for all overtime weeks (in excess of the number of hours applicable under section 7(a) of the Act) in the period for which such additional payments are made.
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4. Amend § 548.305 by revising paragraphs (a), (c), (d), (e), and (f) to read as follows: § 548.305 Excluding certain additions to wages.
(a) See § 548.3(e) for authorized established basic rates.
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(c) The exclusion of one or more additional payments under § 548.3(e) must not affect the overtime compensation of the employee by more than 40 percent of the applicable hourly minimum wage under either section 6(a) of the Act or the state or local law applicable in the jurisdiction in which the employee is employed, whichever is higher, per week on the average for the overtime weeks.
(1) Example. An employee, who normally would come within the 40-hour provision of section 7(a) of the Act, is paid a cost-of-living bonus of $1300 each calendar quarter, or $100 per week. The employee works overtime in only 2 weeks in the 13-week period, and in each of these overtime weeks he works 50 hours. He is therefore entitled to $10 as overtime compensation on the bonus for each week in which overtime was worked (i.e., $100 bonus divided by 50 hours equals $2 an hour; 10 overtime hours, times one-half, times $2 an hour, equals $10 per week). Forty percent of the minimum wage of $7.25 is $2.90 (this example assumes the employee works in a state or locality that does not have a minimum wage that is higher than the minimum wage under the FLSA). Since the overtime on the bonus is more than $2.90 on the average for the 2 overtime weeks, this cost-of-living bonus would be included in the overtime computation under § 548.3(e).
(2) [Reserved]
(d) It is not always necessary to make elaborate computations to determine whether the effect of the exclusion of a bonus or other incidental payment on the employee's total compensation will exceed 40 percent of the applicable hourly minimum wage under either Start Printed Page 68770section 6(a) of the Act or the state or local law applicable in the jurisdiction in which the employee is employed, whichever is higher, per week on the average. Frequently the addition to regular wages is so small or the number of overtime hours is so limited that under any conceivable circumstances exclusion of the additional payments from the rate used to compute the employee's overtime compensation would not affect the employee's total earnings by more than 40 percent of the applicable hourly minimum wage under either section 6(a) of the Act or the state or local law applicable in the jurisdiction in which the employee is employed, whichever is higher, per week. The determination that this is so may be made by inspection of the payroll records or knowledge of the normal working hours.
(1) Example. An employer has a policy of giving employees who have a perfect attendance record during a 4-week period a bonus of $50. The employee never works more than 50 hours a week. Exclusion of this attendance bonus from the rate of pay used to compute overtime compensation could not affect the employee's total earnings by more than $2.90 per week (i.e., 40 percent of the minimum wage of $7.25, assuming the employee works in a state or locality that does not have a minimum wage that is higher than the minimum wage under the FLSA).14
14 For a 50-hour week, an employee's bonus would have to exceed $29 a week to affect his overtime compensation by more than $2.90 (i.e., 40 percent of the minimum wage of $7.25). ($30 ÷ 50 hours worked × 10 overtime hours × 0.5).
(2) [Reserved]
(e) There are many situations in which the employer and employee cannot predict with any degree of certainty the amount of bonus to be paid at the end of the bonus period. They may not be able to anticipate with any degree of certainty the number of hours an employee might work each week during the bonus period. In such situations, the employer and employee may agree prior to the performance of the work that a bonus will be disregarded in the computation of overtime pay if the employee's total earnings are not affected by more than 40 percent of the applicable hourly minimum wage under either section 6(a) of the Act or the state or local law applicable in the jurisdiction in which the employee is employed, whichever is higher, per week on the average for all overtime weeks during the bonus period. If it turns out at the end of the bonus period that the effect on the employee's total compensation would exceed 40 percent of the applicable minimum wage under either section 6(a) of the Act or the state or local law applicable in the jurisdiction in which the employee is employed, whichever is higher, per week on the average, then additional overtime compensation must be paid on the bonus. (See § 778.209 of this chapter, for an explanation of how to compute overtime on the bonus).
(f) In order to determine whether the exclusion of a bonus or other incidental payment would affect the total compensation of the employee by not more than 40 percent of the applicable hourly minimum wage under either section 6(a) of the Act or the state or local law applicable in the jurisdiction in which the employee is employed, whichever is higher, per week on the average, a comparison is made between his total compensation computed under the employment agreement and his total compensation computed in accordance with the applicable overtime provisions of the Act.
(1) Example. An employee, who normally would come within the 40-hour provision of section 7(a) of the Act, is paid at piece rates and at one and one-half times the applicable piece rates for work performed during hours in excess of 40 in the workweek. The employee is also paid a bonus, which when apportioned over the bonus period, amounts to $10 a week. He never works more than 50 hours a week. The piece rates could be established as basic rates under the employment agreement and no additional overtime compensation paid on the bonus. The employee's total compensation computed in accordance with the applicable overtime provision of the Act, section 7(g)(1) 15 would be affected by not more than $1 in any week by not paying overtime compensation on the bonus.16
15 Section 7(g)(1) of the Act provides that overtime compensation may be paid at one and one-half times the applicable piece rate but extra overtime compensation must be properly computed and paid on additional pay required to be included in computing the regular rate.
16 Bonus of $10 divided by fifty hours equals 20 cents an hour. Half of this hourly rate multiplied by ten overtime hours equals $1.
(2) [Reserved]
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5. Amend § 548.400 by revising paragraph (b) and removing the parenthetical authority citation at the end of the section to read as follows: § 548.400 Procedures.
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(b) Prior approval of the Administrator is also required if the employer desires to use a basic rate or basic rates which come within the scope of a combination of two or more of the paragraphs in § 548.3 unless the basic rate or rates sought to be adopted meet the requirements of a single paragraph in § 548.3. For instance, an employee may receive free lunches, the cost of which, by agreement or understanding, is not to be included in the rate used to compute overtime compensation.17 In addition, the employee may receive an attendance bonus which, by agreement or understanding, is to be excluded from the rate used to compute overtime compensation.18 Since these exclusions involve two paragraphs of § 548.3, prior approval of the Administrator would be necessary unless the exclusion of the cost of the free lunches together with the attendance bonus do not affect the employee's overtime compensation by more than 40 percent of the applicable hourly minimum wage under either section 6(a) of the Act or the state or local law applicable in the jurisdiction in which the employee is employed, whichever is higher, per week on the average, in which case the employer and the employee may treat the situation as one falling within § 548.3(e).
PART 778—OVERTIME COMPENSATION
6. The authority citation for part 778 continues to read as follows:
Authority: 52 Stat. 1060, as amended; 29 U.S.C. 201 et seq. Section 778.200 also issued under Pub. L. 106-202, 114 Stat. 308 (29 U.S.C. 207(e) and (h)).
7. Revise § 778.1 to read as follows:
§ 778.1 Introductory statement.
(a) This part contains the Department of Labor's general interpretations with respect to the meaning and application of the maximum hours and overtime pay requirements contained in section 7 of the Fair Labor Standards Act of 1938, as amended (“the Act” or “FLSA”). The Administrator of the Wage and Hour Division will use these interpretations to guide the performance of his or her duties under the Act, and intends the interpretations to be used by employers, employees, and courts to understand employers' obligations and employees' rights under the Act. These official interpretations are issued by the Administrator on the advice of the Solicitor of Labor, as authorized by the Secretary (Reorg. Pl. 6 of 1950, 64 Stat. 1263; Gen. Ord. 45A, published in the Federal Register on May 24, 1950).Start Printed Page 68771
(b) The Department recognizes that compensation practices can vary significantly and will continue to evolve in the future. The Department also recognizes that it is not feasible to address all of the various compensation and benefits arrangements that may exist between employers and employees, both currently and in the future. In general, the FLSA does not restrict the forms of “remuneration” that an employer may pay—which may include an hourly rate, salary, commission, piece rate, a combination thereof, or any other method—as long as the regular rate is equal to at least the applicable minimum wage and compensation for overtime hours worked is paid at the rate of at least one and one-half times the regular rate. While the eight categories of payments in section 7(e)(1)-(8) are the exhaustive list of payments excludable from the regular rate, this part does not contain an exhaustive list of permissible or impermissible compensation practices under section 7(e), unless otherwise indicated. Rather, it provides examples of regular rate and overtime calculations under the FLSA and the types of compensation that may be excluded from regular rate calculations under section 7(e) of the FLSA.
8. Amend § 778.202 by revising paragraphs (a), (b), (c), and (e) to read as follows:
§ 778.202 Premium pay for hours in excess of a daily or weekly standard.
(a) Hours in excess of 8 per day or statutory weekly standard. A written or unwritten employment contract, agreement, understanding, handbook, policy, or practice may provide for the payment of overtime compensation for hours worked in excess of 8 per day or 40 per week. If the payment of such overtime compensation is in fact contingent upon the employee's having worked in excess of 8 hours in a day or in excess of the number of hours in the workweek specified in section 7(a) of the Act as the weekly maximum and such hours are reflected in an agreement or by established practice, the extra premium compensation paid for the excess hours is excludable from the regular rate under section 7(e)(5) of the Act and may be credited toward statutory overtime payments pursuant to section 7(h) of the Act. In applying the rules in this paragraph (a) to situations where it is the custom to pay employees for hours during which no work is performed due to vacation, holiday, illness, failure of the employer to provide sufficient work, or other similar cause, as these terms are explained in §§ 778.216 through 778.224, it is permissible (but not required) to count these hours as hours worked in determining the amount of overtime premium pay, due for hours in excess of 8 per day or the applicable maximum hours standard, which may be excluded from the regular rate and credited toward the statutory overtime compensation.
(b) Hours in excess of normal or regular working hours. Similarly, where the employee's normal or regular daily or weekly working hours are greater or fewer than 8 hours and 40 hours respectively and such hours are reflected in an agreement or by established practice, and the employee receives payment of premium rates for work in excess of such normal or regular hours of work for the day or week (such as 7 in a day or 35 in a week), the extra compensation provided by such premium rates, paid for excessive hours, is a true overtime premium to be excluded from the regular rate and it may be credited toward overtime compensation due under the Act.
(c) Premiums for excessive daily hours. If an employee whose maximum hours standard is 40 hours is hired at the rate of $12 an hour and receives, as overtime compensation under his contract, $12.50 per hour for each hour actually worked in excess of 8 per day (or in excess of his normal or regular daily working hours), his employer may exclude the premium portion of the overtime rate from the employee's regular rate and credit the total of the extra 50-cent payments thus made for daily overtime hours against the overtime compensation which is due under the statute for hours in excess of 40 in that workweek. If the same contract further provided for the payment of $13 for hours in excess of 12 per day, the extra $1 payments could likewise be credited toward overtime compensation due under the Act. To qualify as overtime premiums under section 7(e)(5) of the Act, the daily overtime premium payments must be made for hours in excess of 8 hours per day or the employee's normal or regular working hours. If the normal workday is artificially divided into a “straight time” period to which one rate is assigned, followed by a so-called “overtime” period for which a higher “rate” is specified, the arrangement will be regarded as a device to contravene the statutory purposes and the premiums will be considered part of the regular rate. For a fuller discussion of this problem, see § 778.501.
* * * * *
(e) Premium pay for sixth or seventh day worked. Under sections 7(e)(6) and 7(h), extra premium compensation paid for work on the sixth or seventh day worked in the workweek (where the workweek schedule is reflected in an agreement or by established practice) is regarded in the same light as premiums paid for work in excess of the applicable maximum hours standard or the employee's normal or regular workweek.
9. Amend § 778.203 by revising paragraph (d) to read as follows: § 778.203 Premium pay for work on Saturdays, Sundays, and other “special days”.
* * * * *
(d) Payment of premiums for work performed on the “special day”: To qualify as an overtime premium under section 7(e)(6), the premium must be paid because work is performed on the days specified and not for some other reason which would not qualify the premium as an overtime premium under sections 7(e)(5), (6), or (7) of the Act. (For examples distinguishing pay for work on a holiday from idle holiday pay, see § 778.219.) Thus a premium rate paid to an employee only when he received less than 24 hours' notice that he is required to report for work on his regular day of rest is not a premium paid for work on one of the specified days; it is a premium imposed as a penalty upon the employer for failure to give adequate notice to compensate the employee for the inconvenience of disarranging his private life. The extra compensation is not an overtime premium. It is part of his regular rate of pay unless such extra compensation is paid the employee so as to qualify for exclusion under section 7(e)(2) of the Act in which event it need not be included in computing his regular rate of pay, as explained in § 778.222.
10. Revise § 778.205 to read as follows: § 778.205 Premiums for weekend and holiday work—example.
The application of section 7(e)(6) of the Act may be illustrated by the following example: Suppose, based on a written or unwritten employment contract, agreement, understanding, handbook, policy, or practice, an employee earns $18 an hour for all hours worked on a holiday or on Sunday in the operation of machines by operators whose maximum hours standard is 40 hours and who are paid a bona fide hourly rate of $12 for like work performed during nonovertime hours on other days. Suppose further that the workweek of such an employee begins at 12:01 a.m. Sunday, and in a particular week he works a schedule of Start Printed Page 687728 hours on Sunday and on each day from Monday through Saturday, making a total of 56 hours worked in the workweek. Tuesday is a holiday. The payment of $768 to which the employee is entitled will satisfy the requirements of the Act since the employer may properly exclude from the regular rate the extra $48 paid for work on Sunday and the extra $48 paid for holiday work and credit himself with such amount against the statutory overtime premium required to be paid for the 16 hours worked over 40.
11. Amend § 778.207 by revising paragraph (a) to read as follows: § 778.207 Other types of contract premium pay distinguished.
(a) Overtime premiums are those defined by the statute. The various types of premium payments which provide extra compensation qualifying as overtime premiums to be excluded from the regular rate (under sections 7(e)(5), (6), and (7) and credited toward statutory overtime pay requirements (under section 7(h)) have been described in §§ 778.201 through 778.206. The plain wording of the statute makes it clear that extra compensation provided by premium rates other than those described in the statute cannot be treated as overtime premiums. When such other premiums are paid, they must be included in the employee's regular rate before statutory overtime compensation is computed; no part of such premiums may be credited toward statutory overtime pay.
* * * * *
12. Amend § 778.211 by revising paragraph (c) and adding paragraph (d) to read as follows: § 778.211 Discretionary bonuses.
* * * * *
(c) Promised bonuses not excluded. The bonus, to be excluded under section 7(e)(3)(a), must not be paid pursuant to any prior contract, agreement, or promise. For example, any bonus which is promised to employees upon hiring or which is the result of collective bargaining would not be excluded from the regular rate under this provision of the Act. Bonuses which are announced to employees to induce them to work more steadily or more rapidly or more efficiently or to remain with the firm are regarded as part of the regular rate of pay. Most attendance bonuses, individual or group production bonuses, bonuses for quality and accuracy of work, bonuses contingent upon the employee's continuing in employment until the time the payment is to be made and the like are in this category; in such circumstances they must be included in the regular rate of pay.
(d) Labels are not determinative. The label assigned to a bonus does not conclusively determine whether a bonus is discretionary under section 7(e)(3). Instead, the terms of the statute and the facts specific to the bonus at issue determine whether bonuses are excludable discretionary bonuses. Thus, regardless of the label or name assigned to bonuses, bonuses are discretionary and excludable if both the fact that the bonuses are to be paid and the amounts are determined at the sole discretion of the employer at or near the end of the periods to which the bonuses correspond and they are not paid pursuant to any prior contract, agreement, or promise causing the employee to expect such payments regularly. Examples of bonuses that may be discretionary include bonuses to employees who made unique or extraordinary efforts which are not awarded according to pre-established criteria, severance bonuses, referral bonuses for employees not primarily engaged in recruiting activities, bonuses for overcoming challenging or stressful situations, employee-of-the-month bonuses, and other similar compensation. Such bonuses are usually not promised in advance and the fact and amount of payment is in the sole discretion of the employer until at or near the end of the period to which the bonus corresponds.
13. Amend § 778.212 by revising paragraph (c) to read as follows:
§ 778.212 Gifts, Christmas and special occasion bonuses.
* * * * *
(c) Application of exclusion. If the bonus paid at Christmas or on other special occasion is a gift or in the nature of a gift, it may be excluded from the regular rate under section 7(e)(1) even though it is paid with regularity so that the employees are led to expect it and even though the amounts paid to different employees or groups of employees vary with the amount of the salary or regular hourly rate of such employees or according to their length of service with the firm so long as the amounts are not measured by or directly dependent upon hours worked, production, or efficiency. A Christmas bonus paid (not pursuant to contract) in the amount of two weeks' salary to all employees and an equal additional amount for each 5 years of service with the firm, for example, would be excludable from the regular rate under this category. Employers may also provide gifts with more regularity throughout the year, as long as they are provided with the understanding that they are gifts. Office coffee and snacks provided to employees, for example, would also be excludable from the regular rate under this category.
14. Amend § 778.215 by revising paragraphs (a)(2) and (b) to read as follows:
§ 778.215 Conditions for exclusion of benefit-plan contributions under section 7(e)(4).
(2) The primary purpose of the plan must be to provide systematically for the payment of benefits to employees on account of death, disability, advanced age, retirement, illness, medical expenses, hospitalization, accident, unemployment, legal services, or other events that could cause significant future financial hardship or expense.
* * * * *
(b) Plans under sections of the Internal Revenue Code. In the absence of evidence to the contrary, where the benefit plan or trust has been approved by the Internal Revenue Service as satisfying the requirements of section 401(a), 403(a), or 403(b) of the Internal Revenue Code, is otherwise maintained pursuant to a written document that the plan sponsor reasonably believes satisfies the requirements of section 401(a), 403(a), 403(b), 408(k) or 408(p) of the Internal Revenue Code, or is sponsored by a government employer that reasonably believes the plan satisfies the requirements of section 457(b) of the Internal Revenue Code, the plan or trust will be considered to meet the conditions specified in paragraphs (a)(1), (2), (4), and (5) of this section.
15. Amend § 778.217 by revising paragraphs (a), (b)(1), and (c) to read as follows:
§ 778.217 Reimbursement for expenses.
(a) General rule. Where an employee incurs expenses on his employer's behalf or where he is required to expend sums by reason of action taken for the convenience of his employer, section 7(e)(2) is applicable to reimbursement for such expenses. Payments made by the employer to cover such expenses are not included in the employee's regular rate (if the amount of the reimbursement reasonably approximates the expense incurred). Such payment is not compensation for services rendered by the employees during any hours worked in the workweek.
(1) The actual amount expended by an employee in purchasing supplies, tools, materials, cell phone plans, or equipment on behalf of his employer or in paying organization membership Start Printed Page 68773dues or credentialing exam fees where relevant to the employer's business.
(c) Payments excluding expenses. (1) It should be noted that only the actual or reasonably approximate amount of the expense is excludable from the regular rate. If the amount paid as “reimbursement” is disproportionately large, the excess amount will be included in the regular rate.
(2) A reimbursement amount for an employee traveling on his or her employer's business is per se reasonable, and not disproportionately large, if it:
(i) Is the same or less than the maximum reimbursement payment or per diem allowance permitted for the same type of expense under 41 CFR subtitle F (the Federal Travel Regulation System) or IRS guidance issued under 26 CFR 1.274-5(g) or (j); and
(ii) Otherwise meets the requirements of this section.
(3) Paragraph (c)(2) of this section creates no inference that a reimbursement for an employee traveling on his or her employer's business exceeding the amount permitted under 41 CFR subtitle F (the Federal Travel Regulation System) or IRS guidance issued under 26 CFR 1.274-5(g) or (j) is unreasonable for purposes of this section.
16. Amend § 778.218 by revising paragraphs (b) and (d) to read as follows: § 778.218 Pay for certain idle hours.
(b) Limitations on exclusion. The provision of section 7(e)(2) of the Act deals with the type of absences which are infrequent or sporadic or unpredictable. It has no relation to regular “absences” such as regularly scheduled days of rest. Sundays may not be workdays in a particular establishment, but this does not make them either “holidays” or “vacations,” or days on which the employee is absent because of the failure of the employer to provide sufficient work. The term holiday is read in its ordinary usage to refer to those days customarily observed in the community in celebration of some historical or religious occasion; it does not refer to days of rest given to employees in lieu of or as an addition to compensation for working on other days.
(d) Other similar cause. The term “other similar cause” refers to payments made for periods of absence due to factors like holidays, vacations, sickness, and failure of the employer to provide work. Examples of “similar causes” are absences due to jury service, reporting to a draft board, attending a funeral, inability to reach the workplace because of weather conditions, attending adoption or child custody hearings, attending school activities, donating organs or blood, voting, volunteering as a first responder, military leave, family medical leave, and nonroutine paid leave required under state or local laws. Only absences of a non-routine character which are infrequent or sporadic or unpredictable are included in the “other similar cause” category.
17. Revise § 778.219 to read as follows: § 778.219 Pay for forgoing holidays and unused leave.
(a) Sums payable whether employee works or not. As explained in § 778.218, certain payments made to an employee for periods during which he performs no work because of a holiday, vacation, or illness are not required to be included in the regular rate because they are not regarded as compensation for working. When an employee who is entitled to such paid leave forgoes the use of leave and instead receives a payment that is the approximate equivalent to the employees' normal earnings for a similar period of working time, and is in addition to the employee's normal compensation for hours worked, the sum allocable to the forgone leave may be excluded from the regular rate. Such payments may be excluded whether paid out during the pay period in which the holiday or prescheduled leave is forgone or as a lump sum at a later point in time. Since it is not compensation for work, pay for unused leave may not be credited toward overtime compensation due under the Act. Four examples in which the maximum hours standard is 40 hours may serve to illustrate this principle:
(1) An employee whose rate of pay is $12 an hour and who usually works a 6-day, 48-hour week is entitled, under his employment contract, to a week's paid vacation in the amount of his usual straight-time earnings—$576. He forgoes his vacation and works 50 hours in the week in question. He is owed $600 as his total straight-time earnings for the week, and $576 in addition as his vacation pay. Under the statute he is owed an additional $60 as overtime premium (additional half-time) for the 10 hours in excess of 40. His regular rate of $12 per hour has not been increased by virtue of the payment of $576 vacation pay, but no part of the $576 may be offset against the statutory overtime compensation which is due. (Nothing in this example is intended to imply that the employee has a statutory right to $576 or any other sum as vacation pay. This is a matter of private contract between the parties who may agree that vacation pay will be measured by straight-time earnings for any agreed number of hours or days, or by total normal or expected take-home pay for the period, or that no vacation pay at all will be paid. The example merely illustrates the proper method of computing overtime for an employee whose employment contract provides $576 vacation pay.)
(2) An employee who is entitled under his employment contract to 8 hours' pay at his rate of $12 an hour for the Christmas holiday, forgoes his holiday and works 9 hours on that day. During the entire week, he works a total of 50 hours. He is paid under his contract $600 as straight-time compensation for 50 hours plus $96 as idle holiday pay. He is owed, under the statute, an additional $60 as overtime premium (additional half-time) for the 10 hours in excess of 40. His regular rate of $12 per hour has not been increased by virtue of the holiday pay but no part of the $96 holiday pay may be credited toward statutory overtime compensation due.
(3) An employee whose rate of pay is $12 an hour and who usually works a 40-hour week is entitled to two weeks of paid time off per year per his or her employer's policies. The employee takes one week of paid time off during the year and is paid $480 pursuant to employer policy for the one week of unused paid time off at the end of the year. The leave payout may be excluded from the employee's regular rate of pay, but no part of the payout may be credited toward statutory overtime compensation due.
(4) An employee is scheduled to work a set schedule of two 24-hour shifts on duty, followed by four 24-hour shifts off duty. This cycle repeats every six days. The employer recognizes ten holidays per year and provides employees with holiday pay for these days at amounts approximately equivalent to their normal earnings for a similar period of working time. Due to the cycle of the schedule, employees may be on duty during some recognized holidays and off duty during others, and due to the nature of their work, employees may be required to forgo a holiday if an emergency arises. In recognition of this fact, the employer provides the employees holiday pay regardless of whether the employee works on the holiday. If the employee works on the Start Printed Page 68774holiday, the employee will receive his or her regular salary in addition to the holiday pay. In these circumstances, the sum allocable to the holiday pay may be excluded from the regular rate.
(b) Premiums for holiday work distinguished. The example in paragraph (a)(2) of this section should be distinguished from a situation in which an employee is entitled to idle holiday pay under the employment agreement only when he is actually idle on the holiday, and who, if he forgoes his holiday also, under his contract, forgoes his idle holiday pay.
(1) The typical situation is one in which an employee is entitled by contract to 8 hours' pay at his rate of $12 an hour for certain named holidays when no work is performed. If, however, he is required to work on such days, he does not receive his idle holiday pay. Instead he receives a premium rate of $18 (time and one-half) for each hour worked on the holiday. If he worked 9 hours on the holiday and a total of 50 hours for the week, he would be owed, under his contract, $162 (9 × $18) for the holiday work and $492 for the other 41 hours worked in the week, a total of $654. Under the statute (which does not require premium pay for a holiday) he is owed $660 for a workweek of 50 hours at a rate of $12 an hour. Since the holiday premium is one and one-half times the established rate for nonholiday work, it does not increase the regular rate because it qualifies as an overtime premium under section 7(e)(6), and the employer may credit it toward statutory overtime compensation due and need pay the employee only the additional sum of $6 to meet the statutory requirements. (For a discussion of holiday premiums see § 778.203.)
(2) If all other conditions remained the same but the contract called for the payment of $24 (double time) for each hour worked on the holiday, the employee would receive, under his contract $216 (9 × $24) for the holiday work in addition to $492 for the other 41 hours worked, a total of $708. Since this holiday premium is also an overtime premium under section 7(e)(6), it is excludable from the regular rate and the employer may credit it toward statutory overtime compensation due. Because the total thus paid exceeds the statutory requirements, no additional compensation is due under the Act. In distinguishing this situation from that in the example in paragraph (a)(2) of this section, it should be noted that the contract provisions in the two situations are different and result in the payment of different amounts. In the example in paragraph (a)(2) of this section, the employee received a total of $204 attributable to the holiday: 8 hours' idle holiday pay at $12 an hour (8 × $12), due him whether he worked or not, and $108 pay at the nonholiday rate for 9 hours' work on the holiday. In the situation discussed in this paragraph (b)(2), the employee received $216 pay for working on the holiday—double time for 9 hours of work. All of the pay in this situation is paid for and directly related to the number of hours worked on the holiday.
18. Amend § 778.220 by revising paragraph (b) and adding paragraph (c) to read as follows:
§ 778.220 “Show-up” or “reporting” pay.
(b) Application illustrated. To illustrate, assume that an employee entitled to overtime pay after 40 hours a week whose workweek begins on Monday and who is paid $12 an hour reports for work on Monday according to schedule and is sent home after being given only 2 hours of work. He then works 8 hours each day on Tuesday through Saturday, inclusive, making a total of 42 hours for the week. The employment agreement covering the employees in the plant, who normally work 8 hours a day, Monday through Friday, provides that an employee reporting for scheduled work on any day will receive a minimum of 4 hours' work or pay. The employee thus receives not only the $24 earned in the 2 hours of work on Monday but an extra 2 hours' “show-up” pay, or $24 by reason of this agreement. However, since this $24 in “show-up” pay is not regarded as compensation for hours worked, the employee's regular rate remains $12 and the overtime requirements of the Act are satisfied if he receives, in addition to the $504 straight-time pay for 42 hours and the $24 “show-up” payment, the sum of $12 as extra compensation for the 2 hours of overtime work on Saturday.
(c) Show-up or reporting pay mandated by law. State and local laws may mandate payments or penalties paid to an employee when, before or after reporting to work as scheduled, the employee is not provided with the expected amount of work. All such payments or penalties paid to employees that are mandated by such laws and that are not payments for hours worked by the employee are excludable from the regular rate if such penalties are paid or payments made on an infrequent or sporadic basis. They cannot be credited toward statutory overtime compensation due.
19. Revise § 778.221 to read as follows: § 778.221 “Call-back” pay.
(a) General. Typically, “call-back” or “call-out” payments are made pursuant to agreement or established practice and consist of a specified number of hours' pay at the applicable straight time or overtime rates received by an employee on occasions when, after his scheduled hours of work have ended and without prearrangement, he responds to a call from his employer to perform extra work. The amount by which the specified number of hours' pay exceeds the compensation for hours actually worked is considered as a payment that is not made for hours worked. As such, it may be excluded from the computation of the employee's regular rate and cannot be credited toward statutory overtime compensation due the employee. Payments that are prearranged, however, may not be excluded from the regular rate. For example, if an employer retailer called in an employee to help clean up the store for 3 hours after an unexpected roof leak, and then again 3 weeks later for 2 hours to cover for a coworker who left work for a family emergency, payments for those instances would be without prearrangement and any call-back pay that exceeded the amount the employee would receive for the hours worked would be excludable. However, when payments under §§ 778.221 and 778.222 are prearranged, they are compensation for work. The key inquiry for determining prearrangement is whether the extra work was anticipated and therefore reasonably could have been scheduled. For example, if an employer restaurant anticipates needing extra servers for two hours during the busiest part of each Saturday evening and calls in employees to meet that need instead of scheduling additional servers, that would be prearrangement and any call-back pay would be included in the regular rate.
(b) Application illustrated. The application of the principles in paragraph (a) of this section to call-back payments may be illustrated as follows: An employment agreement provides a minimum of 3 hours' pay at time and one-half for any employee called back to work outside his scheduled hours. The employees covered by the agreement, who are entitled to overtime pay after 40 hours a week, normally work 8 hours each day, Monday through Friday, inclusive, in a workweek beginning on Monday, and are paid overtime compensation at time and one-half for all hours worked in excess of 8 in any day or 40 in any workweek. Assume Start Printed Page 68775that an employee covered by this agreement and paid at the rate of $12 an hour works 1 hour overtime or a total of 9 hours on Monday, and works 8 hours each on Tuesday through Friday, inclusive. After he has gone home on Friday evening, he is called back to perform an emergency job. His hours worked on the call total 2 hours and he receives 3 hours' pay at time and one-half, or $54, under the call-back provision, in addition to $480 for working his regular schedule and $18 for overtime worked on Monday evening. In computing overtime compensation due this employee under the Act, the 43 actual hours (not 44) are counted as working time during the week. In addition to $516 pay at the $12 rate for all these hours, he has received under the agreement a premium of $6 for the 1 overtime hour on Monday and of $12 for the 2 hours of overtime work on the call, plus an extra sum of $18 paid by reason of the provision for minimum call-back pay. For purposes of the Act, the extra premiums paid for actual hours of overtime work on Monday and on the Friday call (a total of $18) may be excluded as true overtime premiums in computing his regular rate for the week and may be credited toward compensation due under the Act, but the extra $18 received under the call-back provision is not regarded as paid for hours worked; thus, it may be excluded from the regular rate, but it cannot be credited toward overtime compensation due under the Act. The regular rate of the employee, therefore, remains $12, and he has received an overtime premium of $6 an hour for 3 overtime hours of work. This satisfies the requirements of section 7 of the Act. The same would be true, of course, if in the foregoing example, the employee was called back outside his scheduled hours for the 2-hour emergency job on another night of the week or on Saturday or Sunday, instead of on Friday night.
20. Revise § 778.222 to read as follows: § 778.222 Other payments similar to “call-back” pay.
The principles discussed in § 778.221 are also applied with respect to certain types of extra payments which are similar to call-back pay. Payments are similar to call-back pay if they are extra payments, including payments made pursuant to state or local scheduling laws, to compensate an employee for working unanticipated or insufficiently scheduled hours or shifts. The extra payment, over and above the employee's earnings for the hours actually worked at his applicable rate (straight time or overtime, as the case may be), is considered as a payment that is not made for hours worked. Payments that are prearranged, however, may not be excluded from the regular rate. Examples of payments similar to excludable call-back pay include:
(a) Extra payments made to employees for failure to give the employee sufficient notice to report for work on regular days of rest or during hours outside of his regular work schedule;
(b) Extra payments made solely because the employee has been called back to work before the expiration of a specified number of hours between shifts or tours of duty, sometimes referred to as a “rest period;”
(c) Pay mandated by state or local law for employees who are scheduled to work the end of one day's shift and the start of the next day's shift with fewer than the legally required number of hours between the shifts; and
(d) “Predictability pay” mandated by state or local law for employees who do not receive requisite notice of a schedule change.
21. Revise § 778.223 to read as follows: § 778.223 Pay for non-productive hours distinguished.
(a) Under the Act an employee must be compensated for all hours worked. As a general rule the term “hours worked” will include:
(1) All time during which an employee is required to be on duty or to be on the employer's premises or at a prescribed workplace; and
(2) All time during which an employee is suffered or permitted to work whether or not he is required to do so.
(b) Thus, working time is not limited to the hours spent in active productive labor, but includes time given by the employee to the employer even though part of the time may be spent in idleness. Some of the hours spent by employees, under certain circumstances, in such activities as waiting for work, remaining “on call”, traveling on the employer's business or to and from workplaces, and in meal periods and rest periods are regarded as working time and some are not. The governing principles are discussed in part 785 of this chapter (interpretative bulletin on “hours worked”) and part 790 of this chapter (statement of effect of Portal-to-Portal Act of 1947). To the extent that these hours are regarded as working time, payment made as compensation for these hours obviously cannot be characterized as “payments not for hours worked.” Such compensation is treated in the same manner as compensation for any other working time and is, of course, included in the regular rate of pay. Where payment is ostensibly made as compensation for such of these hours as are not regarded as working time under the Act, the payment is nevertheless included in the regular rate of pay unless it qualifies for exclusion from the regular rate as one of a type of “payments made for occasional periods when no work is performed due to failure of the employer to provide sufficient work, or other similar cause” as discussed in § 778.218 or is excludable on some other basis under section 7(e)(2). For example, an employment contract may provide that employees who are assigned to take calls for specific periods will receive a payment of $5 for each 8-hour period during which they are “on call” in addition to pay at their regular (or overtime) rate for hours actually spent in making calls. If the employees who are thus on call are not confined to their homes or to any particular place, but may come and go as they please, provided that they leave word where they may be reached, the hours spent “on call” are not considered as hours worked. Although the payment received by such employees for such “on call” time is, therefore, not allocable to any specific hours of work, it is clearly paid as compensation for performing a duty involved in the employee's job and is not of a type excludable under section 7(e)(2). The payment must therefore be included in the employee's regular rate in the same manner as any payment for services, such as an attendance bonus, which is not related to any specific hours of work. The principle in this paragraph (b) also applies when such “on call” pay is mandated by state or local law.
21. Revise § 778.224 to read as follows: § 778.224 “Other similar payments”.
(a) General. Sections 778.216 through 778.223 have enumerated and discussed the basic types of payments for which exclusion from the regular rate is specifically provided under section 7(e)(2) because they are not made as compensation for hours of work. Section 7(e)(2) also authorizes exclusion from the regular rate of other similar payments to an employee which are not made as compensation for his hours of employment. Such payments do not depend on hours worked, services rendered, job performance, or other criteria that depend on the quality or quantity of the employee's work. Conditions not dependent on the quality Start Printed Page 68776or quality of work include a reasonable waiting period for eligibility, the requirement to repay benefits as a remedy for employee misconduct, and limiting eligibility on the basis of geographic location or job position. Since a variety of miscellaneous payments are paid by an employer to an employee under peculiar circumstances, it was not considered feasible to attempt to list them. They must, however, be “similar” in character to the payments specifically described in section 7(e)(2). It is clear that the clause was not intended to permit the exclusion from the regular rate of payments such as most bonuses or the furnishing of facilities like board and lodging which, though not directly attributable to any particular hours of work are, nevertheless, clearly understood to be compensation for services.
(b) Examples of other excludable payments. A few examples may serve to illustrate some of the types of payments intended to be excluded as “other similar payments”.
(1) Sums paid to an employee for the rental of his truck or car
(2) Loans or advances made by the employer to the employee.
(3) The cost to the employer of conveniences furnished to the employee such as:
(i) Parking spaces and parking benefits;
(ii) Restrooms and lockers;
(iii) On-the-job medical care;
(iv) Treatment provided on-site from specialists such as chiropractors, massage therapists, physical therapists, personal trainers, counselors, or Employee Assistance Programs; or
(v) Gym access, gym memberships, fitness classes, and recreational facilities.
(4) The cost to the employer of providing wellness programs, such as health risk assessments, biometric screenings, vaccination clinics (including annual flu vaccinations), nutrition classes, weight loss programs, smoking cessation programs, stress reduction programs, exercise programs, coaching to help employees meet health goals, financial wellness programs or financial counseling, and mental health wellness programs.
(5) Discounts on employer-provided retail goods and services, and tuition benefits (whether paid to an employee, an education provider, or a student loan program).
(6) Adoption assistance (including financial assistance, legal services, or information and referral services).
22. Revise § 778.320 to read as follows: § 778.320 Hours that would not be hours worked if not paid for.
In some cases an agreement or established practice provides for compensation for hours spent in certain types of activities which would not be regarded as working time under the Act if no compensation were provided. Preliminary and postliminary activities and time spent in eating meals between working hours fall in this category. Compensation for such hours does not convert them into hours worked unless it appears from all the pertinent facts that the parties have treated such time as hours worked. Except for certain activity governed by the Portal-to-Portal Act (see paragraph (b) of this section), the agreement or established practice of the parties will be respected, if reasonable.
(a) Time treated as hours worked. Where the parties have reasonably agreed to include as hours worked time devoted to activities of the type described in the introductory text of this section, payments for such hours will not have the mathematical effect of increasing or decreasing the regular rate of an employee if the hours are compensated at the same rate as other working hours. The requirements of section 7(a) of the Act will be considered to be met where overtime compensation at one and one-half times such rate is paid for the hours so compensated in the workweek which are in excess of the statutory maximum.
(b) Time not treated as hours worked. Under the principles set forth in § 778.319, where the payments are made for time spent in an activity which, if compensable under contract, custom, or practice, is required to be counted as hours worked under the Act by virtue of section 4 of the Portal-to-Portal Act of 1947 (see parts 785 and 790 of this chapter), no agreement by the parties to exclude such compensable time from hours worked would be valid. On the other hand, in the case of time spent in an activity which would not be hours worked under the Act if not compensated and would not become hours worked under the Portal-to-Portal Act even if made compensable by contract, custom, or practice, such time will not be counted as hours worked unless agreement or established practice indicates that the parties have treated the time as hours worked. Such time includes bona fide meal periods, see § 785.19. Unless it appears from all the pertinent facts that the parties have treated such activities as hours worked, payments for such time will be regarded as qualifying for exclusion from the regular rate under the provisions of section 7(e)(2), as explained in §§ 778.216 through 778.224. The payments for such hours cannot, of course, qualify as overtime premiums creditable toward overtime compensation under section 7(h) of the Act.
Improper Arbitration Agreements
Improper Arbitration Agreements
Chris Garner v. Inter-state Oil Company
SOURCE:
KEY WORDS:
Arbitration Agreements, Waiver, Class Action Claims
AGENCY:
THE COURT OF APPEAL OF THE STATE OF CALIFORNIA, THIRD APPELLATE DISTRICT
ACTION:
Modified and Certified for Publication (7/23/2020)
Document Citation:
NO. C088374, 2020 WL 4218302
CERTIFIED FOR PUBLICATION:
July 23th, 2020
CHRIS GARNER, Plaintiffs and Appellant, v. INTER-STATE OIL COMPANY, Defendant and Respondent. | C088374 (Super. Ct. No. 34-2018- 00234770-CU-OE-GDS) ORDER MODIFYING OPINION AND GRANTING REQUEST TO PUBLISH [NO CHANGE IN JUDGMENT] |
THE COURT: The opinion in the above-entitled matter filed on June 26, 2020, was not certified for publication in the Official Reports. For good cause it now appears that the opinion should be published in the Official Reports and it is so ordered. It is also ordered that the opinion filed in this case on June 26, 2020, be modified as follows: At page 2, first full paragraph, remove “(1)” and “(2)” from the only sentence, so that the paragraph now reads: “We conclude the arbitration agreement requires arbitration of Garner’s class claims, and Inter-State Oil did not waive reliance on the arbitration agreement.” This modification does not change the judgment.
_________________________
INTRODUCTION
Chris Garner sued Inter-State Oil Company (Inter-State Oil), alleging employment claims and seeking certification of a class action. Based on an arbitration agreement between Garner and Inter-State Oil, the trial court granted Inter-State Oil’s petition to compel arbitration of individual claims only, effectively denying Garner the ability to pursue class action claims. The trial court relied on language in the arbitration agreement stating that Garner waived his right to participate in class action lawsuits.
On appeal from the order granting the motion to compel arbitration, Garner contends (1) the plain language of the arbitration agreement gives him the right to pursue 2 his class claims in arbitration, and (2) Inter-State Oil waived reliance on the arbitration agreement.
We conclude (1) the arbitration agreement requires arbitration of Garner’s class claims, and (2) Inter-State Oil did not waive reliance on the arbitration agreement.
We will modify the trial court’s order to require arbitration of both individual and class claims, and affirm the order as modified.
BACKGROUND
During Garner’s employment with Inter-State Oil, Garner signed a 2014 arbitration agreement. There is no dispute that the 2014 agreement superseded an earlier arbitration agreement.
Garner subsequently filed a class action complaint against Inter-State Oil, asserting a cause of action for unfair business practices (Bus. & Prof. Code, § 17200) and alleging that Inter-State Oil engaged in various illegal employment practices related to wages, breaks, and reimbursement of business expenses. Inter-State Oil filed a petition to compel arbitration, asserting that Garner agreed to arbitrate all claims arising out of his employment with Inter-State Oil and that Inter-State Oil had asked Garner to arbitrate his dispute but Garner refused. Garner acknowledged Inter-State Oil’s petition to compel arbitration and offered to stipulate to arbitration of the class claims, but Inter-State Oil would agree only to arbitrate Garner’s individual claims. Consequently, Garner opposed the petition to compel arbitration, asserting that Inter-State Oil breached the arbitration agreement by refusing to arbitrate the class claims and that the breach waived its rights under the agreement and excused Garner’s duty to arbitrate.
The trial court granted Inter-State Oil’s petition to compel arbitration only as to Garner’s individual claims. It relied on language in the arbitration agreement stating that Garner waived his right to participate in class action lawsuits*. Garner appealed the trial court’s order granting Inter-State Oil’s motion to compel arbitration, citing Franco v. Athens Disposal Co., Inc. (2009) 171 Cal.App.4th 1277, 1288 [an order to arbitrate individual claims is appealable if it constitutes the “death knell” for class litigation].
*At the hearing on the petition to compel arbitration, Garner orally requested a statement of decision. The trial court took the request under submission and later denied It, issuing a detailed minute order. In a footnote in his opening brief, Garner asserts that the failure to issue a statement of decision was reversible error per se. However, Garner failed to raise the issue properly on appeal. Points raised in the opening brief must be set forth separately under an appropriate heading, showing the nature of the question to be presented and the point to be made. (Cal. Rules of Court, rule 8.204(a)(1)(B); Opdyk v. California Horse Racing Bd. (1995) 34 Cal.App.4th 1826, 1830, fn. 4.) An assertion in a footnote does not meet that standard. Therefore, we need not consider the assertion.
DISCUSSION
I
Garner contends the plain language of the arbitration agreement gives him the right to pursue his class claims in arbitration.
We interpret arbitration agreements using the plain meaning rule, seeking to give effect to the mutual intention of the parties. (Valencia v. Smyth (2010) 185 Cal.App.4th 153, 176-177.) Our review of the contract language is de novo. (Molecular Analytical Systems v. Ciphergen Biosystems, Inc. (2010) 186 Cal.App.4th 696, 707.)
Here, resolution hinges on two sentences in the arbitration agreement. The first relevant sentence appears under the admonition to read the agreement carefully, and provides: “To resolve employment disputes in an efficient and cost-effective manner, you and Inter-State Oil Co. agree that any and all claims arising out of or related to your employment that could be filed in a court of law, including but not limited to, claims of unlawful harassment or discrimination, wrongful demotion, defamation, wrongful discharge, breach of contract, invasion of privacy, or class action shall be submitted to final and binding arbitration, and not to any other forum.” The second relevant sentence appears in bold lettering just above the signature lines, and states: “This Arbitration Agreement Is A Waiver Of All Rights To A Civil Jury Trial Or Participation In A Civil Class Action Lawsuit For Claims Arising Out Of Your Employment.”
Garner acknowledges that the second relevant sentence constitutes a waiver. But he disputes the extent of the waiver. He argues that although he waived the right to present his class claims in court, he did not waive the right to submit the class claims to arbitration. Inter-State Oil counters that the arbitration agreement contains a waiver of class claims.
The arbitration agreement at issue here contains an express agreement to arbitrate class action claims. As noted, it provides: “To resolve employment disputes . . . , you and Inter-State Oil Co. agree that any and all claims . . . that could be filed in a court of law, including but not limited to . . . class action shall be submitted to final and binding arbitration, and not to any other forum.”
Inter-State Oil argues “[t]here is no agreement between [Inter-State Oil] and [Garner] to arbitrate class claims. In fact, the express language of the Arbitration Agreement states that [Garner] waives his right to ‘participation in a class action.’ ” In making this argument, Inter-State Oil takes the language of the agreement out of context and ignores the express agreement to arbitrate class claims. The waiver sentence referred to by Inter-State Oil states that the arbitration agreement waived his right to “participation in a civil class action lawsuit,” not to participation in any class action claim. (Italics added.) Inter-State Oil does not account for the word “lawsuit” in its argument. Lawsuits generally refer to court actions. (See Roberts v. Packard, Packard & Johnson (2013) 217 Cal.App.4th 822, 839 [noting the difference between an arbitration claim and a lawsuit (court action)]; see also Mission Beverage Co. v. Pabst Brewing Co., LLC (2017) 15 Cal.App.5th 686, 697 [recognizing the difference between a lawsuit and an arbitration].) There is no indication in the arbitration agreement that the word “lawsuit” was intended to apply, uncharacteristically, to both court actions and arbitration claims. Indeed, the only sentence in the arbitration agreement referring to arbitration of class claims requires arbitration. Thus, read as a whole, this is an agreement to arbitrate all claims, including class claims, with a notice at the end of the agreement that it is a waiver of all jury trials and class action lawsuits. The agreement functions as a waiver of participation in a class action lawsuit because those class claims must be submitted to arbitration.
Inter-State Oil relies on the holding in Lamps Plus, Inc. v. Varela (2019) __ U.S. __ [203 L.Ed.2d 636]. That case, however, is distinguishable. It held that a court may not compel class arbitration when the arbitration agreement does not provide for such arbitration and that an ambiguity about whether class claims may be arbitrated does not constitute consent to arbitrate class claims. (Id. at pp. __ [203 L.Ed.2d at pp. 645-657].) As we have explained, however, when reading the arbitration agreement in this case as a whole, the language of the arbitration agreement provides for arbitration of class claims. Therefore, the parties consented to arbitrate class claims.
Accordingly, we conclude this arbitration agreement provides for arbitration of class claims.
II
Garner further contends Inter-State Oil breached the arbitration agreement by refusing to arbitrate the class claims and therefore waived reliance on the arbitration agreement, thus allowing Garner to pursue his remedies in court. Based on this reasoning and the assertion that the arbitration agreement lacked consideration, Garner claims he is entitled to proceed in court on his class action claims.
“[T]he term ‘waiver’ has a number of meanings in statute and case law. [Citation.] While ‘waiver’ generally denotes the voluntary relinquishment of a known right, it can also refer to the loss of a right as a result of a party’s failure to perform an act it is required to perform, regardless of the party’s intent to relinquish the right. [Citations.] In the arbitration context, ‘[t]he term “waiver” has also been used as a shorthand statement for the conclusion that a contractual right to arbitration has been lost.’ [Citation.]” (St. Agnes Medical Center v. PacifiCare of California (2003) 31 Cal.4th 1187, 1195, fn. 4.)
Federal and state law favor arbitration. Therefore, “waivers are not to be lightly inferred and the party seeking to establish a waiver bears a heavy burden of proof. [Citations.]” (St. Agnes Medical Center v. PacifiCare of California, supra, 31 Cal.4th at p. 1195.) “Both state and federal law emphasize that no single test delineates the nature of the conduct that will constitute a waiver of arbitration. [Citations.] ‘ “In the past, California courts have found a waiver of the right to demand arbitration in a variety of contexts, ranging from situations in which the party seeking to compel arbitration has previously taken steps inconsistent with an intent to invoke arbitration [citations] to instances in which the petitioning party has unreasonably delayed in undertaking the procedure. [Citations.] The decisions likewise hold that the ‘bad faith’ or ‘wilful misconduct’ of a party may constitute a waiver and thus justify a refusal to compel arbitration. [Citations.]” ’ [Citation.]” (Id. at pp. 1195-1196.)
Here, there is no evidence of bad faith or willful misconduct. The parties simply had a disagreement over the meaning of the arbitration agreement, which is not a model of clarity, and took the disagreement to court. That we have resolved the disagreement against Inter-State Oil is not evidence of bad faith or willful misconduct. We have found no case holding that conduct similar to Inter-State Oil’s rose to the level of waiver of the right to arbitrate. Therefore, giving effect to the public policy favoring arbitration, we conclude that the arbitration agreement must be enforced.
Finally, Garner asserts Inter-State Oil’s conduct showed “a lack of mutuality of consideration that renders the [arbitration agreement] null and void.” Garner states: “The [arbitration agreement] lacks consideration because [Inter-State Oil] refused to perform its obligation under the agreement . . . .” For this proposition, Garner cites only to a case which held that, to create a contract with sufficient consideration, “the promises must be mutual in obligation. . . .” (Mattei v. Hopper (1958) 51 Cal.2d 119, 122.) Here, the parties made mutual, obligating promises to arbitrate. The dispute over the meaning of the arbitration agreement did not change those mutual, obligating promises. Adequacy of consideration is in the formation of the contract, not in its performance. (Meyer v. Benko (1976) 55 Cal.App.3d 937, 945.) We therefore reject Garner’s contention that Inter-State Oil’s conduct rendered the arbitration agreement null and void because of lack of consideration.
DISPOSITION
The trial court’s order compelling arbitration is modified to require arbitration of both individual and class claims, and, as modified, the order is affirmed. Garner is awarded his costs on appeal. (Cal. Rules of Court, rule 8.278(a).)
California Travel Time Pay
Employer must pay for Travel Time
Morillion v. Royal Packing Co.
SOURCE:
KEY WORDS:
Travel Pay, Travel Time, Pay Calculation
AGENCY:
Supreme Court of California
ACTION:
Decided, March 27, 2000
Document Citation:
No. S073725. Mar. 27, 2000.
Jose M. Morillion et al., Plaintiffs and Appellant, v. ROYAL PACKING COMPANY, Defendant and Respondent. | S073725 (Superior Court of Monterey County, No. 110399, William D. Curtis, Judge.) (The Court of Appeal, Sixth Dist., No. H017212.) (Opinion by Chin, J., expressing the unanimous view of the court.) |
________________________
OPINION
CHIN, J.-
The general question presented in this case is whether an employer that requires its employees to travel to a work site on its buses must compensate the employees for their time spent traveling on those buses. Specifically, we must decide whether the time agricultural employees spend traveling to and from the fields on employer-provided buses is compensable as "hours worked" under Industrial Welfare Commission wage order No. 14-80 (Wage Order No. 14-80; found at Cal. Code Regs., tit. 8, § 11140). Wage Order No. 14-80 defines "hours worked" as "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." (Cal. Code Regs., tit. 8, § 11140, subd. 2(G); hereafter, all undesignated subdivision references are to subdivisions of section 11140 of title 8.)
Contrary to the Court of Appeal, we conclude the time agricultural employees are required to spend traveling on their employer's buses is compensable under Wage Order No. 14-80 because they are "subject to the control of an employer" and do not also have to be "suffered or permitted to work" during this travel period. (Subd. 2(G).) Thus, we reverse the Court of [22 Cal. 4th 579] Appeal's judgment and remand the matter to the Court of Appeal for further proceedings consistent with this opinion.
I. Factual and Procedural Background
This appeal is taken from a judgment of dismissal entered after the trial court sustained defendant's demurrer without leave to amend. Under well-settled law, therefore, we take as true all properly pleaded material allegations. (Preferred Risk Mutual Ins. Co. v. Reiswig (1999) 21 Cal. 4th 208, 212 [87 Cal. Rptr. 2d 187, 980 P.2d 895].)
Defendant Royal Packing Company (Royal) is a corporation doing business in Monterey County. Plaintiffs Jose M. Morillion and the class members he represents (collectively, plaintiffs) are present and past agricultural employees of Royal. Royal required plaintiffs to meet for work each day at specified parking lots or assembly areas. After plaintiffs met at these departure points, Royal transported them, in buses that Royal provided and paid for, to the fields where plaintiffs actually worked. At the end of each day, Royal transported plaintiffs back to the departure points on its buses. Royal's work rules prohibited employees from using their own transportation to get to and from the fields. fn. 1
In their class action against Royal for, inter alia, California Labor Code violations, unfair business practices, and breach of contract, plaintiffs alleged that they were entitled to compensation (including overtime wages and penalties) for the time they spent traveling to and from the fields. Specifically, plaintiffs claimed Royal should have paid them for the time they spent (1) assembling at the departure points; (2) riding the bus to the fields; (3) waiting for the bus at the end of the day; and (4) riding the bus back to the departure points. fn. 2
Royal demurred to and moved to strike plaintiffs' first amended complaint. The trial court sustained Royal's demurrer without leave to amend, [22 Cal. 4th 580] granted its motion to strike, and dismissed plaintiffs' first amended complaint with prejudice.
Plaintiffs appealed. After concluding that the time plaintiffs spent traveling on Royal's buses is not compensable under federal authority, the Court of Appeal turned its focus to interpreting Wage Order No. 14-80. Relying on Tidewater Marine Western, Inc. v. Bradshaw (1996) 14 Cal. 4th 557, 576 [59 Cal. Rptr. 2d 186, 927 P.2d 296] (Tidewater), the Court of Appeal first ruled it could give no weight to the interpretation of "hours worked" contained in the Division of Labor Standards Enforcement's (DLSE) 1989 Operations and Procedures Manual. fn. 3 The Court of Appeal concluded the DLSE interpretive policy was a regulation and thus void because it was not adopted in accordance with the Administrative Procedure Act (APA; Gov. Code, § 11340 et seq.). However, the Court of Appeal recognized that although the DLSE interpretation of "hours worked" is void, the underlying wage order is not. Thus, the Court of Appeal proceeded to interpret Wage Order No. 14-80 itself.
Although plaintiffs were required to travel on Royal's buses and thus were arguably "subject to the control of an employer" (subd. 2(G)), the Court of Appeal did not find this determination dispositive. Instead, to determine whether the time plaintiffs spent traveling on Royal's buses should be considered "hours worked" under Wage Order No. 14-80, the Court of Appeal emphasized the second clause of the "hours worked" definition: "all the time the employee is suffered or permitted to work ...." (Subd. 2(G).) This clause, the Court of Appeal concluded, limited whether the time was compensable. In affirming the trial court's judgment, the Court of Appeal held the time plaintiffs spent traveling was not compensable as "hours worked" under Wage Order No. 14-80 because plaintiffs did not work, as that term is "commonly understood," during the required transport.
We granted plaintiffs' petition for review to determine the correct interpretation of "hours worked" under Wage Order No. 14-80, and to determine whether the Court of Appeal correctly applied our decision in Tidewater, supra, 14 Cal. 4th 557. [22 Cal. 4th 581]
II. Discussion
[1] The Industrial Welfare Commission (IWC) "is the state agency empowered to formulate regulations (known as wage orders) governing employment in the State of California." (Tidewater, supra, 14 Cal.4th at p. 561, citing Lab. Code, §§ 1173, 1178.5, 1182.) The DLSE "is the state agency empowered to enforce California's labor laws, including IWC wage orders." (Tidewater, supra, 14 Cal.4th at pp. 561-562, citing Lab. Code, §§ 21, 61, 95, 98-98.7, 1193.5.)
"IWC has promulgated 15 [industry and occupation wage] orders12 orders cover specific industries and 3 orders cover occupationsand 1 general minimum wage order which applies to all California employers and employees (excluding public employees and outside salesmen). [Citations.]" (Monzon v. Schaefer Ambulance Service, Inc. (1990) 224 Cal. App. 3d 16, 29 [273 Cal. Rptr. 615] (Monzon).) Wage Order No. 14-80 governs all persons "employed in an agricultural occupation," as defined in the wage order, subject to exceptions not applicable here. (Cal. Code Regs., tit. 8, § 11140, subd. 1; see id., subd. 1(A), (B), (D), (E).) All 15 wage orders contain the same definition of "hours worked" as does Wage Order No. 14-80, except for IWC wage order Nos. 4-89 and 5-89, which include additional language. (Cal. Code Regs., tit. 8, §§ 11040, subd. 2(H), 11050, subd. 2(H).)
A. Wage Order No. 14-80
Both sides argue the import and application of our decision in Tidewater with respect to the interpretation of "hours worked" in the DLSE's 1989 Operations and Procedures Manual. In Tidewater, we determined that the DLSE interpretative policies contained in its manual were regulations. As regulations, the interpretive policies were void because they were not promulgated in accordance with the APA. (Tidewater, supra, 14 Cal.4th at p. 572.) However, we held that although the interpretative policy at issue was void, the underlying wage order, which is not subject to the APA, was not. (Id. at pp. 569, 577.) "Courts must enforce those wage orders just as they would if the DLSE had never adopted its policy." (Id. at p. 577.)
[2] Royal contends that the Court of Appeal correctly gave no deference to the DLSE interpretation of "hours worked" because this interpretive policy was a void regulation under Tidewater, supra, 14 Cal.4th at page 576. On the other hand, plaintiffs argue the Court of Appeal nonetheless should have given some deference to this interpretation because it is long-standing. We have repeatedly rejected plaintiffs' argument. (Tidewater, supra, 14 Cal.4th at p. 576, citing Armistead v. State Personnel Board (1978) 22 Cal.3d 198, 204 [149 Cal. Rptr. 1, 583 P.2d 744].) The Court of Appeal correctly ruled that the DLSE interpretation of "hours worked" in its 1989 Operations and Procedures Manual should be given no deference and also properly determined that it must interpret Wage Order No. 14-80 to decide its enforcement in this case.
[3a] Wage Order No. 14-80 defines "hours worked" as "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." (Subd. 2(G).) Plaintiffs argue that because they are compelled to travel on Royal's buses, they are "subject to the control of an employer," thus making their compulsory travel time compensable as "hours worked." (Ibid.) Pointing to the plain language of "hours worked," plaintiffs maintain the "suffered or permitted to work" language does not limit whether time spent "subject to the control of an employer" is compensable. (Ibid.) We agree.
The word "includes" introduces the "suffered or permitted to work" language of Wage Order No. 14-80. (Subd. 2(G).) Because "includes" is generally a term of enlargement (Ornelas v. Randolph (1993) 4 Cal. 4th 1095, 1101 [17 Cal. Rptr. 2d 594, 847 P.2d 560]), the definition of "hours worked" is expanded by, rather than limited to, the time spent when an employee is "suffered or permitted to work." (Subd. 2(G).) Indeed, the two phrases"time during which an employee is subject to the control of an employer" and "time the employee is suffered or permitted to work, whether or not required to do so" (ibid.)can also be interpreted as independent factors, each of which defines whether certain time spent is compensable as "hours worked." Thus, an employee who is subject to an employer's control does not have to be working during that time to be compensated under Wage Order No. 14-80. (See Bono Enterprises, Inc. v. Bradshaw (1995) 32 Cal. App. 4th 968, 974-975 [38 Cal. Rptr. 2d 549] (Bono) [interpreting the common meaning of "hours worked" in IWC wage order No. 1-89], disapproved on other grounds in Tidewater, supra, 14 Cal.4th at pp. 573-574; Aguilar v. Association for Retarded Citizens (1991) 234 Cal. App. 3d 21, 30 [285 Cal. Rptr. 515] (Aguilar).
While cases interpreting the phrase "hours worked" have not thoroughly examined the definition's scope or defined the relationship between the two clauses, they nonetheless support the view that the "suffered or permitted to work" clause in Wage Order No. 14-80 does not limit the "control" clause under the definition of "hours worked." (Subd. 2(G); see, e.g., Bono, supra, 32 Cal. App. 4th 968; Aguilar, supra, 234 Cal. App. 3d 21; see also Madera Police Officers Assn. v. City of Madera (1984) 36 Cal. 3d 403, 410 [204 Cal.Rptr. 422, 682 P.2d 1087] ["Code 7" meal breaks for police department employees can be counted as hours worked under a two-part analysiswhether the restrictions on employees are "primarily directed toward the fulfillment of the employer's requirements and policies," and whether employees are "substantially restricted during Code 7 time, so as to be unable to attend to private pursuits"]; Monzon, supra, 224 Cal.App.3d at p. 48; id. at p. 50 (conc. & dis. opn. of Johnson, J.) [ambulance drivers who sleep in designated sleeping area are "subject to the control of the employer," and absent an exception excluding the time spent sleeping as compensable, it counts as "hours worked"]; cf. Brewer v. Patel (1993) 20 Cal. App. 4th 1017, 1021 [25 Cal. Rptr. 2d 65] [motel employees who reside on the premises are "subject to the control of an employer" but must "carry[] out assigned duties" to be compensated under former IWC wage order No. 5-89].)
In Bono, the Court of Appeal found that employees who were required to remain on the work premises during their lunch hour had to be compensated for that time under the definition of "hours worked." (Bono, supra, 32 Cal.App.4th at p. 975.) The Bono court focused solely on the "subject to the control of an employer" clause. (Id. at pp. 974-975.) Relying on the dictionary definition of "control," it interpreted the clause to mean when an employer "directs, commands or restrains" an employee. (Id. at p. 975.) Thus, "[w]hen an employer directs, commands or restrains an employee from leaving the work place during his or her lunch hour and thus prevents the employee from using the time effectively for his or her own purposes, that employee remains subject to the employer's control. According to [the definition of hours worked], that employee must be paid." (Ibid.) The Bono court, on the facts before it, did not find that the employees worked during their lunch hour, nor did it reach the issue whether the "suffered or permitted to work" language otherwise limited their right to compensation.
Similarly, in Aguilar, the Court of Appeal held that the time an employer required personal attendant employees to spend at its premises, even when they were allowed to sleep, should be considered "hours worked." fn. 4 (Aguilar, supra, 234 Cal.App.3d at p. 30.) As in Bono, the Aguilar court found that the employees were "subject to the control of an employer" and did not consider whether or not the employees were "suffered or permitted to work." (Aguilar, supra, 234 Cal.App.3d at p. 30.) Instead, the court held the employees should be compensated for the time they spent sleeping while on the employer's premises, even though they performed no work during that time. (Ibid.)
Arguing the "control" clause functions independently of the "suffered or permitted to work" clause, plaintiffs' amici curiae Asian Law Caucus, Inc., et al., rely on two DLSE advice letters, entitled "On-Call" TimeBeepers, and Compensable Time. Unlike interpretive policies contained in the DLSE's 1989 Operations and Procedures Manual, advice letters are not subject to the rulemaking provisions of the APA. (Tidewater, supra, 14 Cal.4th at p. 571; see also Yamaha Corp. of America v. State Bd. of Equalization (1998) 19 Cal. 4th 1, 21 [78 Cal. Rptr. 2d 1, 960 P.2d 1031] (conc. opn. of Mosk, J.) (Yamaha).) Although Royal correctly observes that the factual situations these advice letters address may be distinguished from this case, we nonetheless find persuasive the following general statement of "hours worked" the DLSE made in each of these letters: "Under California law it is only necessary that the worker be subject to the 'control of the employer' in order to be entitled to compensation." (Cal. Dept. Industrial Relations, DLSE Chief Counsel H. Thomas Cadell, advice letter, "On-Call" TimeBeepers (Mar. 31, 1993) pp. 2-3; same author, advice letter, Compensable Time (Feb. 3, 1994) p. 3 [discussing clothes-changing time].) This DLSE interpretation is consistent with our independent analysis of hours worked.
In determining that plaintiffs' compulsory travel time may be compensable under just the "control" language, we do not agree with the Court of Appeal that we would be ignoring the "suffered or permitted to work" language of the "hours worked" definition. (Subd. 2(G).) The Court of Appeal's belief implicitly rests on the assumption that whenever an employee is "suffered or permitted to work, whether or not required to do so" (ibid.), that employee is subject to an employer's control; in other words, the "suffered or permitted to work" part of the definition cannot be independently satisfied. This assumption is incorrect.
[4] Contrary to the Court of Appeal's interpretation, the phrase "suffered or permitted to work, whether or not required to do so" (subd. 2(G)) encompasses a meaning distinct from merely "working." Along with other amici curiae, the California Labor Commissioner notes that "the time the employee is suffered or permitted to work, whether or not required to do so" (ibid.) can be interpreted as time an employee is working but is not subject to an employer's control. This time can include work such as unauthorized overtime, which the employer has not requested or required. "Work not requested but suffered or permitted is work time. For example, an employee may voluntarily continue to work at the end of the shift.... The employer knows or has reason to believe that he is continuing to work and the time is working time. [Citations.]" (29 C.F.R. § 785.11 (1998).) "In all such cases it is the duty of the management to exercise its control and see that the work is not performed if it does not want it to be performed." (29 C.F.R. § 785.13 (1998).) Although our state cases have not interpreted the phrase, federal cases have discussed the meaning of "suffer or permit to work" defining "[e]mploy" under the FLSA. (29 U.S.C. § 203(g).) " '[T]he words "suffer" and "permit" as used in the statute mean "with the knowledge of the employer." ' [Citation.] Thus an employer who knows or should have known that an employee is or was working overtime must comply with the provisions of [29 U.S.C.] § 207 [maximum hours]." (Forrester v. Roth's I. G. A. Foodliner, Inc. (9th Cir. 1981) 646 F.2d 413, 414; see also 29 C.F.R §§ 785.11, 785.13.)
Implicitly relying on the Court of Appeal's revised definition of "hours worked" ("the definition of 'hours worked' should mean the hours suffered or permitted to work [in an agricultural occupation], whether or not required to do so"), Royal argues the definition of "[e]mployed in an agricultural occupation" in Wage Order No. 14-80 (subd. 2(C)(4)) supports its claim that plaintiffs' compulsory travel time is not compensable. Because the phrase "transportation on the farm or to the place of first processing or distribution" (ibid.) is included in the definition of "[e]mployed in an agricultural occupation" (subd. 2(C)), Royal asserts that other types of transportation are accordingly excluded, based on the principle of statutory construction that the inclusion of one term excludes another. Thus, Royal contends plaintiffs' compulsory travel time is excluded and is therefore not compensable as "hours worked." Royal's contention, however, is based on the Court of Appeal's revised definition, which we find to be improper.
In redefining "hours worked," the Court of Appeal substitutes other words for the express language contained under "hours worked," which amounts to improper judicial legislation. (County of Santa Clara v. Perry (1998) 18 Cal. 4th 435, 446 [75 Cal. Rptr. 2d 738, 956 P.2d 1191] [" ' " '[W]hatever may be thought of the wisdom, expediency, or policy of the act [citations],' " ' we have no power to rewrite the statute to make it conform to a presumed intention that is not expressed. [Citations.]") Rather than focusing solely on the express definition of "hours worked," the Court of Appeal extended its review to the definitions of "[e]mployed in an agricultural occupation" and "[e]mploy" contained in Wage Order No. 14-80. (Subd. 2(C), (D).)
Although the definition of "[e]mploy" ("to engage, suffer, or permit to work") (subd. 2(D)) may parallel language within the "hours worked" definition ("suffered or permitted to work") (subd. 2(G)), nothing within Wage Order No. 14-80 suggests reading the definition of "hours worked" as the Court of Appeal revised it. Wage Order No. 14-80 expressly defines "[e]mployed in an agricultural occupation" as the occupations described in subdivision 2(C)(1) through (7). (Subd. 2(C).) Thus, contrary to Royal's contention, the definition of "[e]mployed in an agricultural occupation" (ibid.) does not reference the type of work or activity that may be compensable, but rather lists the kinds of occupations that are subject to Wage Order No. 14-80 ("This Order shall apply to all persons employed in an agricultural occupation ....") (Subd. 1.) Accordingly, we reject Royal's argument that the definition of "[e]mployed in an agricultural occupation" (subd. 2(C)) supports its argument against making plaintiffs' compulsory travel time compensable.
[3b] We also reject Royal's contention that plaintiffs were not under its control during the required bus ride because they could read on the bus, or perform other personal activities. Permitting plaintiffs to engage in limited activities such as reading or sleeping on the bus does not allow them to use "the time effectively for [their] own purposes." (Bono, supra, 32 Cal.App.4th at p. 975.) As several amici curiae observe, during the bus ride plaintiffs could not drop off their children at school, stop for breakfast before work, or run other errands requiring the use of a car. Plaintiffs were foreclosed from numerous activities in which they might otherwise engage if they were permitted to travel to the fields by their own transportation. Allowing plaintiffs the circumscribed activities of reading or sleeping 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. Similarly, as one amicus curiae suggests, listening to music and drinking coffee while working in an office setting can also be characterized as personal activities, which would not otherwise render the time working noncompensable.
Royal argues that this interpretation of "hours worked" is so broad that it encompasses all activity the employer "requires," including all commute time, because employees would not commute to work unless the employer required their presence at the work site, and all grooming time, because employees might not, for example, shave unless the employer's grooming policy required them to do so. We disagree. Royal does not consider the level of control it exercises by determining when, where, and how plaintiffs must travel. In contrast to Royal's employees, employees who commute to work on their own decide when to leave, which route to take to work, and which mode of transportation to use. By commuting on their own, employees may choose and may be able to run errands before work and to leave from work early for personal appointments. The level of the employer's control over its employees, rather than the mere fact that the employer requires the employees' activity, is determinative. (See Bono, supra, 32 Cal.App.4th at p. 975; Aguilar, supra, 234 Cal.App.3d at p. 30.)
Arguing that the compelled nature of plaintiffs' travel is not dispositive, Royal underscores the Court of Appeal's policy argument: "Since the commute was something that would have had to occur regardless of whether it occurred on Royal buses, and [plaintiffs] point to no particular detriment that ensued from riding the Royal buses," compensating employees for this commute time would not "make sense, as a matter of policy." We are not persuaded. First, we emphasize that we should not engage in needless policy determinations regarding wage orders the IWC promulgates. "[R]eview of the [IWC]'s wage orders is properly circumscribed.... 'A reviewing court does not superimpose its own policy judgment upon a quasi-legislative agency in the absence of an arbitrary decision ....' " (Industrial Welfare Com. v. Superior Court (1980) 27 Cal. 3d 690, 702 [166 Cal. Rptr. 331, 613 P.2d 579] (Industrial Welfare Com.).) Second, the Court of Appeal's policy argument in this case suffers from the court's failure to distinguish between travel that the employer specifically compels and controls, as in this case, and an ordinary commute that employees take on their own. When an employer requires its employees to meet at designated places to take its buses to work and prohibits them from taking their own transportation, these employees are "subject to the control of an employer," and their time spent traveling on the buses is compensable as "hours worked." (Subd. 2(G).)
Interpreting the plain language of "hours worked" (subd. 2(G)), we find that plaintiffs' compulsory travel time, which includes the time they spent waiting for Royal's buses to begin transporting them, was compensable. Royal required plaintiffs to meet at the departure points at a certain time to ride its buses to work, and it prohibited them from using their own cars, subjecting them to verbal warnings and lost wages if they did so. By " 'direct[ing]' " and " 'command[ing]' " plaintiffs to travel between the designated departure points and the fields on its buses, Royal " 'control[led]' " them within the meaning of "hours worked" under subdivision 2(G). (Bono, supra, 32 Cal.App.4th at pp. 974-975.)
This conclusion should not be construed as holding that all travel time to and from work, rather than compulsory travel time as defined above, is compensable. Therefore, while the time plaintiffs spent traveling on Royal's buses to and from the fields is compensable as "hours worked" under subdivision 2(G), the time plaintiffs spent commuting from home to the departure points and back again is not. Moreover, we emphasize that employers do not risk paying employees for their travel time merely by providing them transportation. Time employees spend traveling on transportation that an employer provides but does not require its employees to use may not be compensable as "hours worked." (Ibid.) Instead, by requiring employees to take certain transportation to a work site, employers thereby subject those employees to its control by determining when, where, and how they are to travel. Under the definition of "hours worked," that travel time is compensable. (Subd. 2(G); see ante, at p. 587.)
B. Weight of Federal Authority
Although we find plaintiffs' compulsory travel time is compensable under the plain language of Wage Order No. 14-80, we must necessarily examine the federal FLSA (29 U.S.C. § 201 et seq.), the Portal-to-Portal Act of 1947 (Portal-to-Portal Act) (29 U.S.C. § 251 et seq.), and related federal cases and regulations, which the Court of Appeal extensively discussed in reaching a different conclusion. Royal argues that the Court of Appeal's reliance on federal authority was minimal, and, at the same time, contends that we should give deference to federal authority in this case. For reasons that follow, we conclude that the Court of Appeal, notwithstanding its attempt to separate its analyses of federal and state labor law, confounded the two differing bodies of law, leading in part to its erroneous interpretation of Wage Order No. 14-80. [5] Further rejecting Royal's contention, we conclude that the federal statutory scheme, which differs substantially from the state scheme, should be given no deference.
Accepting Royal's argument that federal authority should serve as persuasive guidance on this issue, the Court of Appeal determined that "[t]he federal statutory scheme is not identical to the California scheme but the thrust of the laws is similar." Absent from this determination, however, is any analysis of what aspect or characteristic of these two extensive statutory schemes make their "thrust[s] ... similar." In determining how much weight to give federal authority in interpreting a California wage order, courts are cautioned to make this comparative analysis (Ramirez v. Yosemite Water Co. (1999) 20 Cal. 4th 785, 798 [85 Cal. Rptr. 2d 844, 978 P.2d 2] (Ramirez)), which we undertake here.
First, we recognize that the FLSA does not include an express definition of "hours worked," except "in the form of a limited exception for clothes-changing and wash-up time" under 29 United States Code section 203(o). (29 C.F.R. § 785.6 (1998); see also Bono, supra, 32 Cal.App.4th at p. 976; cf. Monzon, supra, 224 Cal.App.3d at pp. 45-46.) However, the FLSA specifically defines the term "[e]mploy," which "includes to suffer or permit to work." (29 U.S.C. § 203(g).) Federal regulations implementing the FLSA define "hours worked" to include: "(a)[A]ll time during which an employee is required to be on duty or to be on the employer's premises or at a prescribed workplace and (b) all time during which an employee is suffered or permitted to work whether or not he is required to do so." (29 C.F.R. § 778.223 (1998); see also 29 C.F.R. §§ 553.221(b), 785.7 (1998).)
As the Court of Appeal observed, the Portal-to-Portal Act (29 U.S.C. § 251 et seq.), which amended the FLSA, relieves employers from paying minimum wages or overtime compensation to employees for the following activities: "(1) walking, riding, or traveling to and from the actual place of performance of the principal activity or activities which such employee is employed to perform, and (2) activities which are preliminary to or postliminary to said principal activity or activities ...." (29 U.S.C. § 254(a).) Thus, ordinary travel from home to work, "which is a normal incident of employment," is not compensable time under the FLSA and Portal-to-Portal Act. (29 C.F.R. § 785.35 (1998).)
Some courts, as the Court of Appeal noted, have also interpreted the FLSA and Portal-to-Portal Act to preclude paying employees for their time spent traveling on employers' buses from designated meeting points to the actual place of work when employees do not work during the travel period. (See, e.g., Vega v. Gasper (5th Cir. 1994) 36 F.3d 417, 425 (Vega) [farm workers assembled at pickup points and rode to the fields on buses that farm labor contractor-employer provided]; fn. 5 Dolan v. Project Const. Corp. (D.Colo. 1983) 558 F. Supp. 1308 (Dolan) [electricians checked in at the main camp and were required to ride to the jobsite on company-provided buses]; see also 29 C.F.R. § 790.7 (1998) [giving examples of preliminary and postliminary activities under the Portal-to-Portal Act].) Applying this federal authority, the Court of Appeal concluded that plaintiffs' compulsory travel time is not compensable under federal law.
In discussing federal authority, however, the Court of Appeal failed to compare the federal definition of "hours worked" to the state definition under Wage Order No. 14-80. While one of our lower courts has recognized the "parallel" nature of the federal and state definitions of "hours worked" (Monzon, supra, 224 Cal.App.3d at p. 46), the DLSE has underscored the substantial differences between the federal and state definitions in numerous advice letters. (See Yamaha, supra, 19 Cal.4th at p. 21 (conc. opn. of Mosk, J.) [administrative interpretation embodied in opinion letter is persuasive].) We need not resolve the foregoing conflict, however, in that we do not believe the similarity or differences between the two definitions of "hours worked" is dispositive of whether plaintiffs' compulsory travel time is compensable under state law. Instead, we find that the Portal-to-Portal Act, which expressly and specifically exempts travel time as compensable activity under the FLSA (29 U.S.C. § 254), should be the focus of our comparative analysis.
The California Labor Code and IWC wage orders do not contain an express exemption for travel time similar to that of the Portal-to-Portal Act. fn. 6 As set forth in its findings and declaration of policy, Congress enacted the Portal-to-Portal Act in 1947 partly in response to its concern that the FLSA "has been interpreted judicially in disregard of long-established customs, practices, and contracts between employers and employees ...." (29 U.S.C. § 251; see also Dolan, supra, 558 F.Supp. at pp. 1309-1310.) Indeed, in these findings, Congress set forth numerous factors justifying the Portal-to-Portal Act's enactment, from "(1) the payment of such liabilities would bring about financial ruin of many employers and seriously impair the capital resources of many others ..." to "(10) serious and adverse effects upon the revenues of Federal, State, and local governments would occur." (29 U.S.C. § 251.) In addition, the congressional declaration of policy in this section identifies the need "to correct existing evils (1) to relieve and protect interstate commerce from practices which burden and obstruct it ...." (29 U.S.C. § 251(b)(1).)
In contrast to these specific findings showing the congressional intent underlying the Portal-to-Portal Act, the Legislature has not similarly identified existing evils under state law. Royal and its amicus curiae California Farm Bureau Federation identify state statutes, like the California Clean Air Act of 1988 (Health & Saf. Code, § 40910 et seq.), and the Katz-Kopp-Baker-Campbell Transportation Blueprint for the Twenty-First Century, addressing, in part, traffic congestion (Gov. Code, § 65088 et seq.), as public policy grounds for not making plaintiffs' compulsory travel time compensable. Although these statutes promote cognizable benefits to the environment that may be realized when workers share transportation, we are not convinced that they bear directly on whether compulsory travel time is compensable. They do not compare to the express findings and declaration of policy in the federal statute. (29 U.S.C. § 251.) Accordingly, we do not agree with the Court of Appeal that the thrusts of the federal and state statutory schemes are similar, for purposes of deciding whether plaintiffs' compulsory travel time is compensable.
Before June 1947, California's definition of "hours worked" was entitled "Hours Employed" in most wage orders and was defined differently. fn. 7 However, in 1947, when Congress enacted the Portal-to-Portal Act, the IWC amended the definition to the current version of "hours worked." Royal's amicus curiae, the Employers Group, argues that the 1947 amendment, which eliminated specific language regarding waiting time and time when employees are required to be on their employer's premises and on duty (in addition to "time when an employee is required or instructed to travel on the employer's business after the beginning and before the end of her work day"; see, e.g., Cal. Admin. Code, tit. 8, § 11346, subd. (h)(2)), covered preliminary and postliminary activities, including travel time, which are not compensable under the Portal-to-Portal Act. Amicus curiae argues, therefore, that the IWC revised the definition of "hours worked" to correspond to the federal standard.
This argument proves too much. In addition to eliminating the cited language, the IWC added the phrase "the time during which an employee is subject to the control of an employer" to the definition of "hours worked." "Control" may encompass activities described by the eliminated language (as discussed ante, at p. 584). (See Bono, supra, 32 Cal.App.4th at pp. 974-975; Aguilar, supra, 234 Cal.App.3d at p. 30.) Absent convincing evidence of the IWC's intent to adopt the federal standard for determining whether time spent traveling is compensable under state law, we decline to import any federal standard, which expressly eliminates substantial protections to employees, by implication. Accordingly, we do not give much weight to the federal authority on which the Court of Appeal relied. (See Ramirez, supra, 20 Cal.4th at pp. 794-798.)
Moreover, our departure from the federal authority is entirely consistent with the recognized principle that state law may provide employees greater protection than the FLSA. (Ramirez, supra, 20 Cal.4th at p. 795 ["IWC's wage orders, although at times patterned after federal regulations, also sometimes provide greater protection than is provided under federal law in the [FLSA] ...."], citing Tidewater, supra, 14 Cal.4th at pp. 566-567; Aguilar, supra, 234 Cal.App.3d at p. 34; Skyline Homes, Inc. v. Department of Industrial Relations (1985) 165 Cal. App. 3d 239, 247 [211 Cal. Rptr. 792], disapproved on other grounds in Tidewater, supra, 14 Cal.4th at pp. 572-573; see also Industrial Welfare Com., supra, 27 Cal.3d at p. 727.) fn. 8 Indeed, we have recognized that "past decisions additionally teach that in light of the remedial nature of the legislative enactments authorizing the regulation of wages, hours and working conditions for the protection and benefit of employees, the statutory provisions are to be liberally construed with an eye to promoting such protection." (Industrial Welfare Com., supra, 27 Cal.3d at p. 702.) Finally, we note that where the IWC intended the FLSA to apply to wage orders, it has specifically so stated. (See Cal. Code Regs., tit. 8, §§ 11040, subd. 2(H), 11050, subd. 2(H) ["Within the health care industry, the term 'hours worked' means the time during which an employee is suffered or permitted to work for the employer, whether or not required to do so, as interpreted in accordance with the provisions of the [FLSA]"].)
Royal attempts to downplay the extent to which the Court of Appeal relied on federal authority in reaching its decision, arguing that "federal authorities only provided minimal assistance to the Court in its decision." We disagree. We do not perceive any other reason why the Court of Appeal would devote much discussion to the federal scheme, except to indicate the court's view of the persuasiveness and weight of federal authority on this issue. This observation is more compelling in view of the Court of Appeal's discussion interpreting Wage Order No. 14-80, which contains little state authority, but cites the federal case, Vega, supra, 36 F.3d at page 425, and the Court of Appeal's corresponding conclusion that plaintiffs' "travel time appears to have been nothing more than an extended home-to-work-and-back commute."
Notwithstanding Royal's contention that the Court of Appeal did not place great weight on federal authority, Royal urges us to consider federal authority in determining whether the compulsory travel time is compensable. Royal cites California cases holding that because California wage laws are patterned on federal statutes, federal cases and regulations interpreting those federal statutes may serve as persuasive guidance for interpreting California law. (Building Material & Construction Teamsters' Union v. Farrell (1986) 41 Cal. 3d 651, 658 [224 Cal. Rptr. 688, 715 P.2d 648]; Nordquist v. McGraw-Hill Broadcasting Co. (1995) 32 Cal. App. 4th 555, 562 [38 Cal. Rptr. 2d 221]; Monzon, supra, 224 Cal.App.3d at pp. 45-46; Hernandez v. Mendoza (1988) 199 Cal. App. 3d 721, 726, fn. 1 [245 Cal. Rptr. 36]; Alcala v. Western Ag Enterprises (1986) 182 Cal. App. 3d 546, 550 [227 Cal. Rptr. 453].)
Significantly, no case discusses the precise issues of whether travel time is compensable and whether the Portal-to-Portal Act applies. As discussed (ante, at pp. 590-591), Congress's extensive findings underlying the Portal-to-Portal Act, and the absence of such findings in the state scheme, compel the conclusion that federal and state law regarding travel time are dissimilar. Moreover, we recently disapproved of using federal regulations extensively to interpret a California wage order, without recognizing and appreciating the critical differences in the state scheme. (Ramirez, supra, 20 Cal.4th at p. 798.)
In Ramirez, we determined the meaning of "outside salesperson" under IWC wage order No. 7-80 (Cal. Code Regs., tit. 8, § 11070). After finding no California cases or regulations interpreting this wage order, the Court of Appeal turned to federal regulations, which employed a different, qualitative method (as opposed to a quantitative method under the California wage order) to decide whether an employee is an outside salesperson. (Ramirez, supra, 20 Cal.4th at pp. 796-797.) We found that the Court of Appeal erred in relying on federal authority to construe wage order No. 7-80. "In confounding federal and state labor law, and thereby providing less protection to state employees, the Court of Appeal and the trial court departed from the teaching that where the language or intent of state and federal labor laws substantially differ, reliance on federal regulations or interpretations to construe state regulations is misplaced." (Ramirez, supra, 20 Cal.4th at p.798.) "The federal authorities are of little if any assistance in construing state regulations which provide greater protection to workers." (Bono, supra, 32 Cal.App.4th at p. 976.) Indeed, "federal law does not control unless it is more beneficial to employees than the state law." (Aguilar, supra, 234 Cal.App.3d at p. 34, citing 29 U.S.C. § 218.)
After comparing federal and state authority, we conclude that the relevant portions of the FLSA and Portal-to-Portal Act differ substantially from Wage Order No. 14-80 and related state authority. Therefore, Royal's reliance on federal authority, and the Court of Appeal's deference to it, are not persuasive.
C. Public Policy Considerations
[3c] Royal and its amici curiae identify public policy considerations that weigh against making plaintiffs' compulsory travel time compensable. They contend that employer-provided transportation reduces the number of cars in use, thereby reducing air pollution and traffic congestion. (See Cal. Clean Air Act of 1988 (Health & Saf. Code, § 40910 et seq.); Katz-Kopp-Baker-Campbell Transportation Blueprint for the Twenty-First Century (Gov. Code, § 65088 et seq.).) In addition, Royal notes that many agricultural fields are located in remote areas not easily accessible by cars; allowing employees to drive their own cars to the fields increases the risk of accidents and injuries. Employee safety is a significant concern, which all employers should consider. Common sense also dictates that increased automobile emissions are likely to have a detrimental effect on produce being grown in California's fields. Finally, on a practical level, employer-provided transportation benefits both employees and employersemployees travel to the work site free of charge, while employers can ensure enough employees are available and ready to work.
The foregoing considerations, however, do not override the plain language of Wage Order No. 14-80, which supports plaintiffs' claim that their compulsory travel time is compensable as "hours worked." In deciding Royal must compensate plaintiffs for this time, we nonetheless remain optimistic that employers will not be discouraged from providing free transportation as a service to their employees. As we have emphasized throughout, Royal required plaintiffs to ride its buses to get to and from the fields, subjecting them to its control for purposes of the "hours worked" definition. However, employers may provide optional free transportation to employees without having to pay them for their travel time, as long as employers do not require employees to use this transportation.
III. Conclusion
We conclude that plaintiffs' compulsory travel time is compensable as "hours worked" under Wage Order No. 14-80. Therefore, we reverse the Court of Appeal's judgment and remand this action to the Court of Appeal for further proceedings consistent with this opinion.
George, C. J., Mosk, J., Kennard, J., Baxter, J., Werdegar, J., and Brown, J., concurred.
On May 10, 2000, the opinion was modified to read as printed above.
Tips in California
Mandatory Service Charge Might be Gratuity
O'Grady v. Merchant Exchange Productions, Inc.
SOURCE:
KEY WORDS:
Mandatory Service Charge, Tips, Gratuity
AGENCY:
THE COURT OF APPEAL OF THE STATE OF CALIFORNIA, FIRST APPELLATE DISTRICT
ACTION:
Modified and Certified for Publication (10/31/2019)
A148513, NCGC-15-547796
CERTIFIED FOR PUBLICATION:
October 31th, 2019
LAUREN O’GRADY, Plaintiff and Appellant, v. MERCHANT EXCHANGE PRODUCTIONS, INC., Defendant and Respondent, | A148513 (San Francisco County Super. Ct. No. CGC-15-547796) |
_________________________
INTRODUCTION
An employer is in the business of providing a banquet facility at which food and beverages are served. The employer automatically adds a substantial "service charge" to the contract for every banquet. The issue presented here is whether the "service charge" may be a "gratuity" that Labor Code section 351 requires to go to the non-managerial employees involved with the actual serving of the food and beverages. An employee filed a putative class action to force the employer to treat the service charge as a gratuity and distribute all of it to employees. The employer takes the position that two Court of Appeal opinions establish, as a matter of law under stare decisis, that a service charge can never be a gratuity. The trial court agreed, sustained the employer's general demurrer without leave to amend, and entered a judgment of dismissal.
We conclude there is no categorical prohibition why what is called a service charge cannot also meet the statutory definition of a gratuity. In light of this conclusion, and because plaintiff has not been allowed at least one opportunity to amend her complaint, we reverse.
*Statutory references are to the Labor Code unless otherwise indicated.
BACKGROUND
Plaintiff Lauren O'Grady describes herself in her complaint as "a banquet server and bartender at the Julia Morgan Ballroom" in San Francisco that is owned and operated by defendant Merchant Exchange Productions, Inc. Plaintiff brought this putative class action for herself "and on behalf of all others similarly situated, namely all other non-managerial food and beverage banquet service employees who have worked at the Julia Morgan Ballroom."
The object of the action was defendant's practice of "routinely" and "automatic[ally]" imposing "a 21% service charge to its food and beverage banquet bills." Part of the monies collected are retained by defendant, with the rest distributed by defendant to "managers and other non-service employees." Plaintiff alleged that the service charge constituted a gratuity, but defendant "has failed to distribute the total proceeds of these gratuities to non-managerial food and beverage banquet service employees as required by California law," and thus defendant's practice "violates" section 351.
This point, because it is central to our decision, merits quotation of the relevant allegations in full: "It is typical and customary in the hospitality industry that establishments impose gratuity charges in the range of 18-22% of the food and beverage bill. Thus, when customers have paid these charges, it is reasonable for them to have believed they were gratuities to be paid to the service staff. Indeed, because of the way these charges are depicted to customers, and the custom in the food and beverage industry that gratuities in the range of 18-22% are paid for food and beverage service, customers have paid these charges reasonably believing they were to be remitted to the service staff. However, the defendant has not remitted the total proceeds of these gratuities to the non-managerial employees who serve the food and beverages. Instead, the defendant has had a policy and practice of retaining for itself a portion of these gratuities and/or using a portion of these gratuities to pay managers or other non-service employees."
Defendant's practice was alleged to support causes of action for "statutory gratuity violation," "intentional interference with advantageous relations," "breach of implied contract," and "unjust enrichment."
Based on Searle v. Wyndham Internat., Inc. (2002) 102 Cal.App.4th 1327 (Searle) and Garcia v. Four Points Sheraton LAX (2010) 188 Cal.App.4th 364 (Garcia), the trial court determined defendant was not violating section 351. Because the alleged statutory violation was the predicate for each of plaintiff's causes of action, the trial court sustained defendant's general demurrer to the entire complaint. Plaintiff appeals from that ruling.**
**Although plaintiff purports to appeal from a "judgment of dismissal after an order sustaining a dismissal," the record and the register of actions establish that only the order sustaining the demurrer was ever filed or entered. That order is not itself appealable (I. J. Weinrot & Son, Inc. v. Jackson (1985) 40 Cal.3d 327, 331), but it may be reviewed on appeal from an ensuing judgment or order of dismissal. (Code Civ. Proc., § 906; Jennings v. Marralle (1994) 8 Cal.4th 121, 128.) Nevertheless, "[t]he fact that no judgment of dismissal was entered on the order sustaining the demurrer does not present an insurmountable obstacle to the appeal." (Shepardson v. McLellan (1963) 59 Cal.2d 83, 88.) It would be inefficient to dismiss the appeal, order the trial court to enter a judgment of dismissal on the sustained demurrer, and then permit a subsequent appeal from the dismissal. (Ibid.) Instead, as the parties treat the appeal as properly before us, we "deem[] the order sustaining the demurrer to incorporate a judgment of dismissal and interpret [] plaintiff's notice of appeal as applying to such dismissal." (Federer v. County of Sacramento (1983) 141 Cal.App.3d 184, 185.)
DISCUSSION
Standard Of Review
The scope of permitted review is well established: "It is well established that a demurrer tests the legal sufficiency of the complaint. [Citations.] On appeal from a dismissal entered after an order sustaining a demurrer, we review the order de novo, exercising our independent judgment about whether the [complaint] states a cause of action as a matter of law. [Citations.] We give the [complaint] a reasonable interpretation, reading it as a whole and viewing its parts in context. [Citations.] We deem to be true all material facts that were properly pled. [Citation.] We must also accept as true those facts that may be implied or inferred from those expressly alleged. [Citation.] We . . . do not accept contentions, deductions or conclusions of fact or law. [Citations.]" (City of Morgan Hill v. Bay Area Air Quality Management Dist. (2004) 118 Cal.App.4th 861, 869-870.) Nor do we consider the pleader's ability to prove its allegations. (Caldera Pharmaceuticals, Inc. v. Regents of University of Cal. (2012) 205 Cal.App.4th 338, 350.)
The Nature Of "Gratuity" Under Section 351
"Gratuity" is statutorily defined to "include[] any tip, gratuity, money, or part thereof that has been paid or given to or left for an employee by a patron of a business over and above the actual amount due the business for services rendered or for goods, food, drink, or articles sold or served to the patron." (§ 350, subd. (e).)
Section 351 provides: "No employer or agent*** shall collect, take, or receive any gratuity or a part thereof that is paid, given to, or left for an employee by a patron, or deduct any amount from wages due an employee on account of a gratuity, or require an employee to credit the amount, or any part thereof, of a gratuity against and as a part of the wages due the employee from the employer. Every gratuity is hereby declared to be the sole property of the employee or employees to whom it was paid, given, or left for. An employer that permits patrons to pay gratuities by credit card shall pay the employees the full amount of the gratuity that the patron indicated on the credit card slip, without any deductions for any credit card payment processing fees or costs that may be charged to the employer by the credit card company. Payment of gratuities made by patrons using credit cards shall be made to the employees not later than the next regular payday following the date the patron authorized the credit card payment."
The purpose of section 351 is to prevent employers from using any gratuity-related practice which reduces an employee's wages, or diverts monies belonging to employees, practices which are condemned as a "fraud upon the public." (§ 356; see Henning v. Industrial Welfare Com. (1988) 46 Cal.3d 1262, 1270-1275, 1278-1279; Searle, at 1332.)
***"Agent" means every person other than the employer having the authority to hire or discharge any employee or supervise, direct, or control the acts of employees." (§ 350, subd. (d).) It is clear that an employer who establishes a tip pool cannot require, or allow, that a portion of it go to the employer's agent. (Jameson v. Five Feet Restaurant, Inc. (2003) 107 Cal.App.4th 138, 143-145.); accord, Budrow v. Dave & Buster's of California, Inc. (2009) 171 Cal.App.4th 875, 878 ["Section 351 would be violated if management collected any part of the tip"].)
The Indefinite Nature of A "Service Charge"
The terms "tip," "gratuity," "service charge" are commonly used as if they are interchangeable synonyms. (E.g., Cal. Code Regs., tit. 18, § 1603(h).) Many other states expressly use them all in measures that serve the same function as section 351.****However, investigation demonstrates that "service charge" is a protean term of no fixed meaning.
Black's defines service charge as "A charge assessed for performing a service." (Black's Law Dict. (10th ed. 2014) p. 1576, col. 2.) This tautological imprecision is hardly helpful, but it is representative. (See, e.g., Oxford Eng. Dict. "a charge made . . . for services rendered"("service charge" OED Online, Oxford University Press (June 2017) [www.oed.com/viewEntry 176678 [as of June 22, 2018]; Webster's 10th Collegiate Dict. (1993) p. 1067, col. 2 ["a fee charged for a particular service"].) Viewed in isolation, "service charge" is an amorphous, shapeless concept. It only assumes meaning from the surrounding context.
For example, in the context of retail installment contracts, it commonly means interest on an unpaid installment (Dickey v. Bank of Clarksdale (Miss. 1938) 184 So. 314; TruServ Corp. v. Morgan's Tool & Supply Co., Inc. (Pa. 2012) 39 A.3d 253; Michigan Pipe & Valve-Lansing, Inc. v. Hebeler Enterprises, Inc. (Mich.App. 2011) 808 N.W.2d 323; Kenworthy v. Bolin (Wash.App. 1977) 564 P.2d 835); but if interest is stated separately, it can be viewed as a late fee. (Roy A. Miller & Sons, Inc. v. Industrial Hardwoods Corp. (Ind.App. 2002) 775 N.E.2d. 1168.) In this context, the service charge would appear to be a cost for delayed payment of the principal.
In the context of public utilities, a service charge is a fee charged for commencing, maintaining, or discontinuing gas, electricity, water, etc. (Gov. Code, § 54346.2; Brooktrails Township Community Services Dist. v. Board of Supervisors of Mendocino County (2013) 218 Cal.App.4th 195; Craig v. City of Macon (Mo. 1976) 543 S.W.2d 772; Mountain Cable Co. v. Department of Taxes (Vt. 1998) 721 A.2d 507; Roanoke v. Fisher (Va. 1952) 70 S.E.2d 274; cf. Gov. Code, § 53056 [regulating amount of service charge by cable television system]; In re Vista Marketing Group Ltd. (Bankr. N.D. Ill. 2016) 557 B.R. 630.) In this context, the service charge would appear to represent a labor cost.
California pays particular attention to use of service charges to evade statutory commands or duties. For example, "`"A lender is not prohibited from charging an extra and reasonable amount for incidental services, expenses or risk additional to the lawful interest other than for the loan of money. He may make a reasonable charge for investigating, arranging, negotiating, brokering, making, servicing, collecting and enforcing his obligation,"'" so long as the "service charge" is not a subterfuge for evading usury limits. (Forte v. Nolfi (1972) 25 Cal.App.3d 656, 681, quoting Klett v. Security Acceptance Co. (1952) 38 Cal.2d 770, 787.) An insurer is allowed similar latitude so long as it is not using a service charge to inflate the premium. (Troyk v. Farmers Group, Inc. (2009) 171 Cal.App.4th 1305, 1324-1325.) And every credit card company and retailer "who fails to correct a billing error" within the statutory period "shall not be entitled to . . . any interest, finance charges, service charges, or other charges." (Civ. Code, §§ 1747.50, subd. (b) [credit card issuer], 1747.60, subd. (b) [retailers].)
In short, simply calling something a "service charge" hardly ever explains what it is or why it is being imposed.
Given that the context here also involves the provision of food and drink, the restaurant tip pool decisions are an obvious point of reference. At this point it is appropriate to consider the two decisions deemed controlling by the trial court, both of which involved tipping, compulsion, and service charges.
**** See, e.g., In re Alleged Labor Law Violation of Chafoulis Mgmt. Co. (1997 Minn.Ct.App.) 572 N.W.2d 326 [statute & explanatory regulation]; Tenn. Code Ann., § 50-2-107. Hawaii has a statute unequivocally declaring that a service charge by "[a]ny hotel or restaurant . . . for the sale of food or beverage services" is "tip income" which shall be distributed "directly to its employees" unless the establishment has "clearly disclose[d] to the purchaser of the services that the service charge is being used to pay for costs or expenses other than wages and tips of employees." (Hawaii Rev. Stat. § 481B-14 construed in Davis v. Four Seasons Hotel Ltd. (2010 Hawaii) 228 P.3d 303.)
Searle And Garcia
In Searle, a San Diego hotel imposed a service charge of 17% to every room service order. The bill presented with each room service order set out the amount of the order itself; the 17% service charge; a $3 "room delivery charge"; and "a blank line for a tip or gratuity." "According to Searle, the hotel's room service billing practice is deceptive because guests are not advised the service charge is in fact a gratuity paid to the server. Searle also contends the service charge is unfair because it compels guests to pay a gratuity, which Searle believes should be entirely voluntary. Thus Searle allege[d] the hotel's room service practices violate the unfair competition law (UCL)." (Searle, supra, at pp. 1330-1331.)
Section 351 does not feature prominently in Searle. The statute is mentioned as codifying state policy that "`ensure[s] that employees, not employers, receive the full benefit of gratuities that patrons intend for the sole benefit of those employees who serve them.'" (Searle, at p. 1332, quoting Leighton v. Old Heidelberg, Ltd. (1990) 219 Cal.App.3d 1062, 1068.) The Court of Appeal concluded the hotel's billing practice was not an unfair one: "[O]ther than Labor Code section 351, we are not aware of any express regulation of tipping on room service billing. Because [the hotel's] practice is alleged to cause servers to receive more in the way of tips than would otherwise occur, it plainly does not violate the spirit or letter of Labor Code section 351." (Searle, at pp. 1333-1334.)
The court explained: "Anyone who has debated with a small child about the temptations presented by an in-room minibar stocked with $3 candy bars and $2 sodas will recognize that a hotel has many means of generating revenue from its guests. What a hotel does with the revenue it earns—from either the minibar, in-room movies or its room service charges—is of no direct concern to hotel guests. The minibar patron, like the room service patron, is given both clear notice the service being offered comes at a hefty premium and the freedom to decline the service. Just as the hotel patron has no legitimate interest in what the hotel does with the large premium it earns from its minibar snacks, the patron has no legitimate interest in what the hotel does with the service charge. The hotel is free to retain for itself the large premium, as well as the service charge, or to remit all or some of the revenue to its employees. Because the service charge is mandatory and because the hotel is free to do with the charge as it pleases, the service charge is simply not a gratuity which is subject to the discretion of the individual patron.
"Moreover, the hotel's decision to compensate its room service servers by way of the 17 percent service charge in no material way interferes with the patron's reasonable expectations with respect to the custom of tipping. As commentary, custom and Labor Code section 351 make clear, tipping is solely a matter between patron and server. While some patrons will care about what the server receives from his employer, others will not. The curiosity of those who . . . want to know how much the server has in his pocket is just that: curiosity. It is a curiosity about something, i.e., the server's financial condition, in which the tipper has no legitimate interest.
"[I]n arguing that it is deceitful to fail to clearly notify hotel guests that the service charge is paid to the server, Searle again assumes the patron has some right to know what the hotel is paying the room service server. . . . [W]e are not willing to indulge the notion that the custom of tipping somehow gives patrons the right to know how much a server is being paid by his or her employer. In this situation the only obligation the hotel has to the patron is the one codified in Labor Code section 351: an assurance that, however large or small, the tip will go to the server, not the employer. Wyndham's compensation practices of course fully meet this obligation. In sum, in failing to advise its guests as to how it compensates its employees, the hotel is not guilty of any deceit even under the broad provisions of the UCL." (Searle, at pp. 1334-1335.)
The Searle court proceeded the way it did it because it accepted the truth of Searle's allegation that the service charge was used to pay employee gratuities. Thus its conclusion that "[i]n the final analysis we are not offended by the hotel's practice of treating the service charge as a means of providing reliable compensation to its employees and not as a substitute for the customary tip. The hotel's service charge practices provide a guaranteed level of compensation for its servers and at the same time encourage its servers to provide the hotel's guests with good service." (Searle, at p. 1336.)
The plaintiffs in Garcia were service workers employed by hotels in Los Angeles. A city ordinance in plain effect directed hotel employers to treat mandatory service charges as owed "to workers who render the services for which the charges have been collected."^ (Garcia, at p. 370.) The Court of Appeal rejected the hotels' contention that the ordinance was preempted by section 351:
^Quoting parts of the ordinance, the Garcia court described its terms thusly: "The operative provisions of the Ordinance are codified in sections 184.00 through 184.06 of the Los Angeles Municipal Code. [Citation.] Section 184.02 states in pertinent part: `Service Charges shall not be retained by the Hotel Employer but shall be paid in the entirety by the Hotel Employer to the Hotel Worker(s) performing services for the customers from whom the Service Charges are collected.' [Citation.] Service charges may not be paid to `supervisory or managerial employees,' and must be paid to `Hotel Worker(s) equitably and according to the services that are or appear to be related to the description of the amounts given by the hotel to the customers.' [Citation.] Service charges collected for banquets or catered meetings `shall be paid equally to the Hotel Workers who actually work the banquet or catered meeting'; service charges collected for room service `shall be paid to the Hotel Workers who actually deliver the food and beverage associated with the charge'; and service charges collected for porterage services `shall be paid to the Hotel Workers who actually carry the baggage associated with the charge.' [Citation.] Gratuities and tips left by customers for a hotel worker are excluded. [Citation.] A `service charge' is defined in the Ordinance as `all separately-designated amounts collected by a Hotel Employer from customers that are for service by Hotel Workers, or are described in such a way that customers might reasonably believe that the amounts are for those services, including but not limited to those charges designated on receipts under the term "service charge," "delivery charge," or "porterage charge."' [Citation.]" (Garcia, at pp. 375-376, fns. omitted.)
The Labor Code mandates that all gratuities are employees' property. (§§ 350-356.) A `gratuity' is `any tip, gratuity, money, or part thereof that has been paid or given to or left for an employee by a patron of a business over and above the actual amount due the business for services rendered or for goods, food, drink, or articles sold or served to the patron. . . .' (§ 350, subd. (e), italics added.) A gratuity is not a service charge. A service charge is a separately designated amount collected by a hotel from patrons that is part of the amount due the hotel for services rendered, rather than something `over and above the amount due.' [Citation.] Thus, a service charge by definition is not a gratuity. The Legislature has made clear that amounts due for services (which include service charges) are not gratuities. This interpretation is confirmed by a recent amendment to the definition of gratuity carving out an exception for dancing services. (§ 350, subd. (e).) (Garcia, supra, at p. 377.)
The definition of gratuity in section 350, subdivision (e) does not define employers' property rights; it establishes the meaning of `gratuity' as that term appears elsewhere in the statute. [Citation.] Section 351 prohibits employers from collecting, taking, or receiving any gratuity or part thereof and declares: `Every gratuity is hereby declared to be the sole property of the employee or employees to whom it was paid, given, or left for.' (§ 351.) When read in this statutory context, a `gratuity' as that term is defined in the statute does not refer to employers' property rights. [Citation.] We do not read section 351 or any other provision in the Labor Code governing gratuities to address employers' property rights. (Garcia, at p. 378)
The Ordinance does not contradict the Labor Code. The Labor Code and the Ordinance address different subjects and attempt to prevent different harms. [Citations.] The Labor Code attempts to prevent fraud on the public in connection with the practice of tipping to ensure employees receive the tips left for them by the patron. [Citations.] The Ordinance addresses certain hotels' business practices of pricing services based upon two components—a base price and a surcharge, designated as a `service charge.' The service charge is not negotiable and is part of the amount the patron must pay for the services. The Ordinance does not prevent hotels from charging patrons for services, but it recognizes that the 15 percent to 20 percent service charge misleads the public into assuming that the service charge is being distributed to the worker performing the services. The Ordinance mandates that the service charge must be paid to the worker. Thus, the Ordinance does not prohibit what the Labor Code commands or command what it prohibits. (Garcia, at 379, fn. omitted.)
As we have previously stated, the definition of gratuity, when read in context, does not address employers' property rights. Neither the statute [i.e., section 351] nor the legislative history of the Labor Code provisions regulating gratuities indicate the Legislature has considered the ownership of services charges, or has expressed an intent to prohibit local regulation of service charges. The Legislature may have devoted a whole separate article to gratuities, . . . but sections 350 to 356 do not even completely cover the subject of gratuities. As the tip-pooling cases illustrate, the Labor Code does not even address all employer conduct in connection with gratuities. [Citations.] . . . We do not agree with the hotels that the legislative history reveals the Legislature's `conscious decision to allow employers to keep service charges.' We cannot locate any citation to the legislators' consideration of service charges. On the record before us, we conclude the Legislature has not turned its attention to this issue. It is therefore not a matter that has become a state concern. (Garcia, supra, at p. 380)
The paramount state concern in the Labor Code is in regulating gratuities and preventing fraud on the public in connection with the practice of tipping. (§§ 351, 356.) The Legislature, however, has not expressed a paramount concern to ensure that employers have absolute ownership of business revenue designated as a `service charge.' (Garcia, supra, at pp. 380-381.)
Searle and Garcia do involve "service charges" imposed in the context of selling food and drink to the public, charges that were intended to function as gratuities. However, there are crucial distinguishing features that prevent these decisions from being controlling precedent. In Searle, the bill presented to the room service customer clearly differentiated between the service charge and the gratuity the customer could choose to add. The service charge used by the employer as the source of internally-assigned gratuities was not disclosed to the customer. The purpose of section 351 being to ensure that all of a tip goes to the employee, there was no problem when the hotel's practice was "alleged to cause servers to receive more in the way of tips" than the person ordering room service may have intended: the practice did not "violate the spirit or letter" of the statute. (Searle, supra, at pp. 1333-1334, italics added.) Here, plaintiff alleges that precisely the opposite is occurring. The ordinance in Garcia clearly treated service charges as gratuities and, like sections 350 and 351, mandated that they go only to employees performing the service, not management. In Searle the mandatory service charge was imposed by the employer. In Garcia what the employer might call a service charge was legislatively reclassified as a gratuity. The voluntary nature of a gratuity discussed in Searle is thus incompatible with the actual results in Searle and Garcia, namely, allowing a mandatory gratuity to stand. In light of these differences, neither Searle nor Garcia are controlling. Neither, or both together, should be read, as defendant does, as categorially establishing that a service charge—even a mandatory one—can never qualify as a gratuity.
Accordingly, plaintiff's cause of action, for "statutory gratuity violation" is not foreclosed by Searle and Garcia, as the trial court believed, and is sufficient to survive a general demurrer.
It may well be that there are further impediments. For example, tipping is ordinarily thought of as a voluntary bilateral transaction between the patron of a commercial establishment and the employee of the establishment. Moreover, there are decisions treating the patron's intent as unascertainable, if not irrelevant. (See Leighton v. Old Heidelberg, Ltd., supra, 219 Cal.App.3d 1062, 1069 ["We dare say that the average diner has little or no idea and does not really care who benefits from the gratuity he leaves, as long as the employer does not pocket it, because he rewards for good service no matter which one of the employees directly servicing the table renders it." This, and the near impossibility of being able to determine the intent of departed diners in leaving a tip"]; quoted with approval in Avidor v. Sutter's Place, Inc. (2013) 212 Cal.App.4th 1439, 1446-1447, & fn. 2, 1448 ["customer intent is not relevant"]; Etheridge v. Reins Internat. California, Inc. (2009) 172 Cal.App.4th 908, 919-920; Budrow v. Dave & Buster's of California, Inc., supra, 171 Cal.App.4th 875, 880, fn. 4.) On the other hand, the context here involves large sums, almost certainly pursuant to a written contract, where the universe of patrons, and their intent vis-à-vis the mandatory "service charge," may be more subject to discovery than ordinary restaurant diners.
On the other hand, those same decisions, considering so-called "tip pools," accept that voluntary donative intent is not a fetish. An accepted element of coercion may enter when a third party—the employer—imposes a mandatory practice requiring employees to share gratuities voluntarily made by customers. The customer may intend the gratuity left to go only to the individual who personally served him or her at the table, but the employer's tip pool sharing policy will be enforced. We are also mindful that Labor Code provisions concerning compensation and working conditions are liberally construed in favor of employees. (E.g., Augustus v. ABM Security Services, Inc. (2016) 2 Cal.5th 257, 262; McLean v. State of California (2016)1 Cal.5th 615, 622.) Both section 350 and section 351 define a gratuity as what is "paid . . . for an employee by a patron." This language does not preclude the possibility that the payment may not be entirely voluntary in the mind of the patron.
Plaintiff also suggests a custom "in the hospitality industry" to treat sums designated as "service charges" as gratuities for employees. For present purposes, we accept the existence of such an industry custom, however inartfully alleged. (E.g., McConnell v. Merrill Lynch, Pierce, Fenner & Smith, Inc. (1978) 21 Cal.3d 365, 382 ["custom is established by the allegations of the . . . complaint"]; Tenet Healthsystem Desert, Inc. v. Blue Cross of California (2016) 245 Cal.App.4th 821, 842-843; cf. Shaw v. Cal. Dept. of Alcoholic Beverage Control (9th Cir. 1986) 788 F.2d 600, 610 ["The plaintiffs need not specifically allege a custom or policy; it is enough if the custom or policy can be inferred from the allegations of the complaint"].)
We only allude to the matters, for at this outset of the pleading stage, we are not to be concerned with whether plaintiff can prove the allegations of her complaint. (Caldera Pharmaceuticals, Inc. v. Regents of University of Cal., supra, 205 Cal.App.4th 338, 350.)
In light of the foregoing, it remains only to briefly look at plaintiff's other causes of action.
The trial court concluded that plaintiff's second cause of action, for "intentional interference with advantageous relations," and her third cause of action, for breach of implied contract," defective because "Our case law teaches that you need to show . . . that that interference is done wrongfully. There's no allegation here of . . . anything being done wrongfully." However, it is an obvious inference, which is sufficient here (see City of Morgan Hill v. Bay Area Air Quality Management Dist., supra, 118 Cal.App.4th 861, 869), and which could be easily supplied in an amended pleading.
The trial court concluded that plaintiff's final cause of action, for unjust enrichment, "under California law, it's not a cause of action." This is too broad, it can be a viable cause of action. (E.g., Professional Tax Appeal v. Kennedy-Wilson Holdings, Inc. (2018) 29 Cal.App.5th 230, 238; Lyles v. Sangadeo-Patel (2014) 225 Cal.App.4th 759, 769; Hirsch v. Bank of America (2003) 107 Cal.App.4th 708, 722.) This may be especially true when the gravamen of the claim rests upon conduct or a practice that might be tantamount to conversion (cf. Lu v. Hawaiian Gardens Casino, Inc. (2010) 50 Cal.4th 592, 603-604 ["To the extent that an employee may be entitled to certain misappropriated gratuities, we see no apparent reason why other remedies, such as a common law action for conversion, may not be available"]), and would thus easily qualify as "wrongful" for purposes of the second and third causes of action.
Finally, this is an original complaint, making it the subject of an additional solicitude. As the leading treatise puts it: "`Liberality in permitting amendment is the rule, if a fair opportunity to correct any defect has not been given.' [Citations.] Indeed, in the case of an original complaint, plaintiff need not even request leave to amend. `Unless the complaint shows on its face that is incapable of amendment, denial of leave to amend constitutes an abuse of discretion, irrespective of whether leave to amend is requested or not.' [Citations.]" Weil & Brown, Cal. Practice Guide: Civil Procedure Before Trial (The Rutter Group 2018) 7:129, p. 7(1)-58.)
DISPOSITION
The "Order Granting Defendant Merchant Exchange Productions, Inc.'s Demurrer to Plaintiff's Class Action Complaint" filed April 5, 2016, is amended by adding a paragraph dismissing the complaint. As so modified, the order/judgment is reversed. Plaintiff shall recover her costs on appeal.
Stewart, J. and Miller, J., concurs.
California Holding Overtime
Holding Overtime Provision may not be legal
Pacific Merchant Shipping Ass'n v. Aubry
SOURCE:
KEY WORDS:
Overtime Provision, Overtime Pay, State law, Maritime law
AGENCY:
U.S. District Court for the Central District of California
ACTION:
ADJUDGED, ORDERED, AND DECLARED
709 F. Supp. 1516 (C.D. Cal. 1989)
CERTIFIED FOR PUBLICATION:
March 1st, 1989
PACIFIC MERCHANT SHIPPING ASSOCIATION, a nonprofit California corporation; American Institute of Merchant Shipping, an unincorporated trade association; Offshore Marine Service Association, a nonprofit Louisiana corporation; Western Oil & Gas Association, a nonprofit California corporation; and Clean Seas, an unincorporated cooperative association, Plaintiffs,, v. Lloyd W. AUBRY, Jr., Labor Commissioner, Division of Labor Standards Enforcement, Department of Industrial Relations, State of California, Defendant, Tidewater Marine Service, Inc. and Western Boat Operations, Inc., Intervenors. | No. CV 88-0848-AWT. |
_________________________
BACKGROUND
This case raises a novel issue of federal admiralty law: Whether California can apply its overtime pay provisions to seamen and to maritime employees employed on vessels situated primarily on the high seas.
Plaintiffs and intervenors seek declaratory and injunctive relief that California's labor laws are preempted by federal admiralty law and the United States Constitution insofar as they purport to regulate the wages, hours and working conditions of maritime employees whose work situs is a vessel normally situated on the high seas and seamen who work both on the high seas and within the territorial zone. Defendant is the California State Labor Commissioner (Labor Commissioner). He is in charge of the Division of Labor Standards Enforcement, Department of Industrial Relations, State of California (DLSE).
The matter is before the Court on the parties' cross-motions for summary judgment. Although there is some quibbling, essentially the parties agree upon the material *1518 facts and that only issues of law are involved.
A. Terminology
At issue in this case is whether "seaman" can take advantage of California's overtime compensation provisions. The term "seaman" is differently defined for different purposes. General maritime law defines "seamen" broadly to include individuals whose performance on board a vessel contributes to the functioning of the vessel, accomplishment of its mission or to the operation or welfare of the vessel. See 46 U.S.C. § 10101(3); Norris, The Law of Seamen, §§ 2.1, 2.3, 2.10 (4th ed. 1985); Norman v. Aubrey Burke & Assoc., 585 F. Supp. 494 (E.D.La.1984).
In contrast, the Fair Labor Standards Act of 1938 (FLSA), 29 U.S.C. § 201 et seq., defines "seamen" much more narrowly for purposes of exemption from federal overtime provisions. 29 U.S.C. § 213(b) (6). Under the FLSA, a "seaman" is an individual who performs service "primarily as an aid in the operation of such vessel as a means of transportation, provided he performs no substantial amount of work of a different character." 29 C.F.R. § 783.31. For enforcement purposes, the federal Wage and Hour Administrator's position is that work of a different character is "substantial" if it occupies more than 20 percent of the time worked by an employee during any given workweek. Id. at § 783.37. However, the term "seaman" covers all types of crewmembers including, for example, sailors, engineers, radio operators, firemen, pursers, surgeons, cooks and stewards. Id. at § 783.32.
Those employees who are exempt under the FLSA will be referred to as "seamen." Those employees who fall within the general admiralty definition but not under the FLSA exemption, will be referred to as "maritime employees." However, it should be noted that all of these employees work in situations covered by admiralty law, i.e., on vessels on navigable waters. See 14 Wright, Miller & Cooper, Federal Practice and Procedures: Jurisdiction 2d § 3671, p. 412 (cases cited therein); In re Paradise Holdings, Inc., 619 F. Supp. 21, 22 (C.D.Cal. 1984),[1]aff'd, 795 F.2d 756 (9th Cir.), cert. denied, 479 U.S. 1008, 107 S. Ct. 649, 93 L. Ed. 2d 705 (1986).
For territorial purposes, "navigable waters" are divided into three zones. The zone inland from a nation's shores is referred to as the inland or internal waters zone. These waters (e.g., bays and inlets) are subject to the complete sovereignty of the coastal nation. The second zone, measured seaward from the nation's coast, is comprised of a three-mile belt known as the marginal or territorial sea. A coastal nation may exercise extensive control over the territorial zone, but cannot deny the right of innocent passage to foreign nations. The third zone lies beyond the territorial sea and is referred to as the "high seas." This zone consists of international waters that are not subject to the dominion of any nation. See United States v. Alaska, 422 U.S. 184, 196-97, 95 S. Ct. 2240, 2249-50, 45 L. Ed. 2d 109 (1975).
Most of the rights and obligations of shipowners and seamen have been codified in 46 U.S.C. § 2101, et. seq. (the Shipping Act). The Act divides shipping routes into three categories foreign, intercoastal and coastwise voyages. Foreign voyages consist of voyages between ports in different countries. 46 U.S.C. § 10301(a) (1). Intercoastal voyages consist of voyages between ports on the Atlantic and Pacific coasts. 46 U.S.C. § 10301(a) (2). Coastwide voyages consist of voyages between ports in different states (except adjoining states). 46 U.S.C. § 10501(a). In addition, the United States Coast Guard defines coastwise vessels as those "normally navigating the waters of any ocean or the Gulf of Mexico 20 nautical miles or less offshore." 46 C.F.R. § 70.10-13. See, e.g., Sewell v. M/V Point Barrow, 556 F. Supp. 168 (D.Alaska 1983) (seamen on vessels engaged in offshore test drilling operations on high seas employed on coastwise vessels).
*1519 The crewmembers whose claims precipitated this action were not on "voyages" that fall under any of these three categories. Their vessels either stayed on the high seas surrounding the oil rigs or "voyaged" between one port and the oil rigs. Therefore, a number of wage provisions in the Shipping Act do not apply to the affected crewmembers.
The vessels are, however, covered by a number of other Shipping Act provisions, as well as Coast Guard regulations. For example, some provisions limit the number of hours a crewmember can work to no more than 12 of 24 hours at sea and require a seagoing crew to be divided into at least two watches. 46 U.S.C. § 8104. In addition, all seamen and maritime employees are covered by a wide range of "protection and relief" statutes that govern, for example, health, taxes and attachment of wages. 46 U.S.C. §§ 11101-11112.
B. The Parties
Plaintiffs Pacific Merchant Shipping Association, American Institute of Merchant Shipping, Offshore Marine Service Association and Western Oil & Gas Association are maritime trade associations that collectively represent over one hundred maritime employers, including plaintiff Clean Seas and Intervenor Tidewater Marine, Inc. The plaintiff trade associations often represent their members before local, state and federal legislative bodies, and initiate proceedings in state and federal courts to protect the interests of their members. Many of the plaintiff trade associations' members maintain business offices in California and provide maritime employment on American flag vessels to California residents, as well as to residents of other states. The maritime employers own and operate a variety of vessels registered pursuant to federal law. These vessels engage in foreign, intercoastal and coastwise voyages.
Most of the employees who are the subject of this action were or are employed by Clean Seas. Clean Seas is an unincorporated, cooperative association formed by several major oil companies. It contains and cleans up marine oil spills. It also performs other maritime activities to fulfill federal environmental protection requirements. In order to perform its duties, Clean Seas operates three American flag vessels under the names of Mr. Clean, Mr. Clean II and Mr. Clean III. Mr. Clean and Mr. Clean II are "bareboat charter" vessels. Mr. Clean III is owned by Clean Seas. Mr. Clean II is a 138 foot marine vessel moored in Port San Luis Harbor, California, about one-quarter mile from the shore. It remains moored approximately 90% of the time. The owners of Mr. Clean II contracted with Clean Seas to provide the vessel and its operating crew, and to operate the vessel pursuant to Clean Seas needs. Most of Mr. Clean II's duties involve control and cleanup of oil spills and related environmental discharge control work in the Santa Barbara Channel.
Mr. Clean III is a 181 foot, 292 gross ton ocean-going vessel permanently stationed on the high seas over the Pedernales and Arguello oil fields on the Outer Continental Shelf.[2] These oil fields are located four to ten nautical miles off the California coast and contain four oil drilling and production platforms. Each of these platforms is located six to seven nautical miles off the California coast. Except when on active duty, Mr. Clean III remains tied to a buoy anchored to the seabed approximately seven nautical miles off the California coast. Since June, 1986, Mr. Clean III has been on station, except during two months of extended repairs, and during occasional visits to port for minor repairs, resupply or the annual Coast Guard inspections. Crewmembers assigned to Mr. Clean III travel by helicopter from the Santa Barbara Airport to the vessel at the beginning of their service and return via helicopter at the end.
Intervenors Tidewater Marine Service and Western Boat Operators (collectively Tidewater) provide offshore transportation and support services throughout the world and have provided crew and supply boat services to offshore oil drilling platforms off the California coast since 1964. In the Santa Barbara Channel, Tidewater provides *1520 transportation services to a number of oil drilling platforms ranging in distance from one to twelve nautical miles off the coast. When a vessel is called, it goes to a pier to pick up cargo or passengers, travels to its destination (usually an offshore platform) and then returns to the pier or its mooring buoy.
The Labor Commissioner's duties include administering and enforcing compliance with many of California's labor laws, including the state's wage and hour laws. Don C. Craib (Craib), is the Senior Deputy Labor Commissioner in DLSE's Santa Barbara office. In all matters pertinent to this action, Craib is authorized to act on behalf of the Labor Commissioner.
At the base of this legal dispute lie the employees: the three crewmembers of Mr. Clean II[3] and nine crewmembers assigned to Mr. Clean III.[4] All twelve appear to be California residents in that they have California addresses. Two of the crewmembers were licensed mates and ten were certified as "seamen" by the Coast Guard; the ten worked primarily on the "clean-up" operations. Nine of those ten had written employment agreements. In February 1988, Tidewater employee Frank Kleman (Kleman), also filed a complaint for overtime compensation with the DLSE. Tidewater had employed Kleman as a "deckhand" on a crewboat from July 1, 1981, through February 2, 1986, when he took a medical leave of absence.[5]
C. The Factual Setting
Although the Labor Commissioner continues to quibble over the definition of "seamen," all of the employees are either seamen or maritime employees. The parties agree that the wage claims of these crewmembers are governed by admiralty law. The issue in this case is whether California wage and hour laws should be applied as part of federal admiralty law in adjudicating the wage claims of maritime employees who work on the high seas and of seamen who work both on the high seas and within the territorial zone. See East River S.S. Corp. v. Transamerica Delaval, Inc., 476 U.S. 858, 864, 106 S. Ct. 2295, 2298, 90 L. Ed. 2d 865 (1985).
The Cal.Lab.Code empowers the Labor Commissioner and his agents to (i) investigate employee complaints concerning wages, (ii) conduct administrative hearings for the purpose of resolving wage claims, (iii) issue orders, decisions and awards, (iv) assess liability and impose monetary sanctions and penalties, and (v) prosecute actions in court to enforce California's wage and hour laws. Cal.Lab.Code § 98. Cal. Lab.Code § 1173 grants the Industrial Welfare Commission (IWC) authority to regulate the wages, hours and working conditions of those employees employed in the State of California. IWC Wage Order 4-80 covers "professional, technical, clerical, mechanical, and similar occupations." Cal. Adm.Code § 11345(2) (c). Based on his interpretation of his statutory authority, the Labor Commissioner applied Wage Order 4-80 to the crewmembers and awarded sizable overtime compensation.
The Labor Commissioner based his decision covering the crewmembers of Mr. Clean II on the fact that Mr. Clean II is moored in California's territorial waters and that a substantial part of the vessel's operation occurs within those waters. Therefore, he determined that crewmembers on Mr. Clean II fell under the jurisdiction of California's laws and regulations governing employer and employee relationships, and that neither the FLSA nor other maritime statutes preempt California's laws.
Prior to the hearing of Mr. Clean III crewmembers' individual claims, plaintiffs *1521 separately challenged the Labor Commissioner's jurisdiction; that challenge was rejected. Because of that prior ruling, the decision covering Mr. Clean III's crewmembers does not discuss any jurisdictional issues; specifically, it makes no distinction between vessels moored one-quarter mile from shore and those moored seven miles from shore. The Labor Commissioner did determine that whether or not the wage claimants were FLSA-exempt seamen does not preclude California's authority to regulate seamen independent of any federal jurisdiction.
The Labor Commissioner has stayed all similar DLSE proceedings pending the outcome of this action, including Kleman's claims. However, in his answers to interrogatories and in Craib's deposition testimony, the Labor Commissioner discussed (hypothetically) his views of the Labor Commissioner's jurisdiction. In his deposition, Craib stated that DLSE would have jurisdiction over claims of employees on a boat stationed outside California's territorial boundaries, even if the employees were not California residents. (Ex. 109 at 124-28.) ("I'm saying that we may properly exercise jurisdiction over and adjudicate the wage claim of a non-California resident whose primary work situs is outside the territorial bounds of California ... My attorney said we have jurisdiction.")
Similarly, in his response to plaintiff's interrogatories, the Labor Commissioner claimed the right to assert jurisdiction over both non-California residents and California residents employed as seamen on a United States vessel that is permanently stationed outside the territorial boundaries of California. (Ex. 112 at 188-89.) This jurisdictional assertion was based on the fact that "[s]eaman is an inhabitant of California; and the vessel is not engaged in foreign and/or intercoastal voyages. California is exercising its police powers for the general welfare of its inhabitants."
D. Plaintiffs' Claims
Although plaintiffs purport to state three separate claims for relief, all three claims raise similar arguments and, in fact, are but one and the same claim. In substance, plaintiffs claim that California labor laws conflict with federal admiralty law, place a burden on maritime commerce and represent an impermissible arrogation of power on the part of a state to extend its territorial boundaries and exercise its sovereignty over the high seas. Intervenors' claims are similar.
Plaintiffs and intervenors seek a declaratory judgment that all California wage, hours and working condition laws are inapplicable to maritime employees whose work situs is a vessel on the high seas and to all seamen, regardless of their work situs. In addition, both seek permanently to enjoin the Labor Commissioner from enforcing these state laws against them or their members.
DISCUSSION
Before reaching the substance of this legal dispute, it is necessary to address two preliminary issues raised by the parties.
A. Jurisdiction
The Labor Commissioner contends that the action should be dismissed for lack of subject matter jurisdiction. He argues that by bringing this as a declaratory judgment action, plaintiffs have not changed their preemption assertion from its essential nature as a defense. See e.g., Miller-Wohl Co. v. Commissioner of Labor & Indus., 685 F.2d 1088, 1090 (9th Cir. 1982) (employer's anticipation of a federal defense of preemption by Title VII of employee's state discrimination claim insufficient to provide basis for federal question jurisdiction).
The present case, however, involves a request for coercive injunctive relief, in addition to declaratory relief. In such a situation, the Supreme Court has recognized that federal question jurisdiction is appropriate:
It is beyond dispute that federal courts have jurisdiction over suits to enjoin state officials from interfering with federal rights. A plaintiff who seeks injunctive relief from state regulation, on the ground that such regulation is preempted by a federal statute which, by virtue of the Supremacy Clause of the Constitution, *1522 must prevail, thus presents a federal question which the federal courts have jurisdiction under 28 U.S.C. § 1331 to resolve. This Court, of course, frequently has resolved pre-emption disputes in a similar jurisdictional posture.
Shaw v. Delta Air Lines, Inc., 463 U.S. 85, 96 n. 14, 103 S. Ct. 2890, 2899 n. 14, 77 L. Ed. 2d 490 (1983) (citations omitted). Accord, Franchise Tax Board v. Construction Laborers Vacation Trust, 463 U.S. 1, 20 n. 20, 103 S. Ct. 2841, 2852 n. 20, 77 L. Ed. 2d 420 (1983) ("A person subject to a scheme of federal regulation may sue in federal court to enjoin application to him of conflicting state regulations and a declaratory judgment action by the same person does not necessarily run afoul of the Skelly Oil doctrine.").
In Southern Pacific Transp. Co. v. Public Util. Comm'n, 716 F.2d 1285, 1288 (9th Cir.1983), the Ninth Circuit, applying Shaw, held that Miller-Wohl applies when only declaratory relief is sought. When, as here, plaintiffs also seek an injunction, federal question jurisdiction is proper. Id.[6]
B. Scope of Declaratory Relief
In their Complaint, plaintiffs request that this court adjudge "the legal rights and obligations of maritime employers with respect to their employment of seamen and/or other maritime workers on vessels normally situated on the high seas...." In addition, Tidewater seeks a ruling covering all of its seamen, regardless of their work situs. The Labor Commissioner contends that plaintiffs and intervenors seek a declaratory judgment not on matters in controversy, but rather the adjudication of a future hypothetical controversy.
The Supreme Court has spoken often on the question of whether a situation presents an Article III case or controversy:
The difference between an abstract question and a "case or controversy" is one of degree, of course, and is not discernible by any precise test. The basic inquiry is whether the "conflicting contentions of the parties ... present a real, substantial controversy between parties having adverse legal interests, a dispute definite and concrete, not hypothetical or abstract."
A plaintiff who challenges a statute must demonstrate a realistic danger of sustaining a direct injury as a result of the statute's operation or enforcement. But "[o]ne does not have to await the consummation of threatened injury to obtain preventive relief. If the injury is certainly impending that is enough."
Babbitt v. United Farm Workers Nat'l Union, 442 U.S. 289, 297-98, 99 S. Ct. 2301, 2308, 60 L. Ed. 2d 895 (1979) (citations omitted). The parties do not dispute that a real controversy exists between the Labor Commissioner and the employers of the affected crewmembers. Instead, they dispute whether the remaining plaintiffs have demonstrated a realistic danger of sustaining a direct injury as a result of the Wage Order's enforcement.
According to the Labor Commissioner, plaintiff's request for relief is too broad because there is no evidence that the Labor Commissioner threatens to enforce California labor laws except with regards to the "affected employees" of Clean Seas and Tidewater. The Labor Commissioner claims that he will not exercise jurisdiction over non-inhabitants; however, this representation is directly contradicted by his answers to interrogatories and Craib's deposition testimony. He is bound by the latter. Radobenko v. Automated Equip. Corp., 520 F.2d 540, 544 (9th Cir.1975) (party may not create issue of fact on a summary judgment motion by contradicting his own deposition). He also maintains that no evidence suggests that workers employed by other members of the plaintiff associations are affected by his overtime awards to *1523 Clean Seas' employees; thus, that any relief should be narrowly tailored.
Although this contention is not without merit, the argument goes too far. The rights of three other groups are directly at stake. The first group consists of the remaining crewmembers of Mr. Clean III, at least some of whom would be eligible to bring similar claims for overtime compensation. Further, Mr. Clean III still employs seven of the nine employees who were awarded overtime by the Labor Commissioner. Therefore, Clean Seas faces additional liability. Tidewater also faces similar, potential liability from its remaining crewmembers.
The second group is employers with a direct stake in the outcome of this litigation and includes those members of the plaintiff associations who employ seamen or other maritime employees on vessels on the high seas, but which do not engage in foreign or intercoastal voyages. Plaintiffs maintain that their members operate vessels, similar to those used by Clean Seas, on the high seas, that are not engaged in foreign or intercoastal voyages. The third group affected by this litigation is those employers that have seamen, like Kleman, working within the territorial zone.[7]
Plaintiffs also challenge a broader group of statutory provisions than the Labor Commissioner has attempted so far to apply. The Labor Commissioner has applied California's overtime compensation provision, specifically IWC Wage Order 4-80, to seamen and maritime employees. In applying this Wage Order, he has also invoked a number of statutory provisions covering other wage and hour requirements. E.g., Cal.Lab.Code §§ 200 (definitions), 201 (time for payment upon discharge), 203 (penalty for failure to make payment at required time), 204 (requirement of semimonthly payment), 226 (itemized statement of wages). Clearly, the Court can determine whether application of those provisions was proper. However, plaintiffs request that the Court determine the applicability of "all other provisions of California wage and hour law." The Labor Commissioner contends that there is no evidence that he will seek to enforce any other provisions of the Wage Order other than the overtime provision. The Court agrees; consequently, it will limit its review to the overtime provisions only and to any other wage and hour provisions intertwined with the overtime compensation provision.
C. Does Maritime Law Preempt State Law
Both sides recognize the need for uniform regulation under admiralty law. Norris, supra, § 1.3, p. 4-5, citing Panama R. Co. v. Johnson, 264 U.S. 375, 44 S. Ct. 391, 68 L. Ed. 748 (1924). Therefore, state laws which conflict with maritime law cannot be enforced. Southern Pacific Co. v. Jensen, 244 U.S. 205, 217, 37 S. Ct. 524, 529, 61 L. Ed. 1086 (1917); Daughtry v. Diamond M Co., 693 F. Supp. 856, 861 (C.D.Cal.1988). However, state laws that do not conflict may be incorporated into admiralty law and applied. 14 Wright & Miller, Federal Practice & Procedure: Jurisdiction 2d § 3671, pp. 421-422 (state law may not be applied to prejudice the characteristic features of maritime law or to disrupt the harmony it strives to bring to international and interstate relations); Askew v. American Waterways Operators, Inc., 411 U.S. 325, 341-42, 93 S. Ct. 1590, 1600, 36 L. Ed. 2d 280 (1973). Although a number of federal provisions do cover the overtime wages of seamen on a variety of voyages, no federal maritime law expressly addresses the overtime pay of the seamen and other maritime workers such as those involved in the case at bench. Because of this absence of express federal provision, the Labor Commissioner contends that California labor laws do not conflict with federal law and are thus not preempted.
Plaintiffs' response is two-fold: First, although no federal maritime statute expressly addresses overtime compensation for the seamen and maritime employees involved in this action, the Shipping Act *1524 does govern other aspects of these employees' wages, hours and working conditions. Plaintiffs cannot, however, find safe harbor in this Act; defendant's exercise of jurisdiction conflicts directly with only one of its provisions. (When a seaman's wages must be paid. Compare 46 U.S.C. § 10313, with Cal.Lab.Code § 204.) In light of the general exemption of coastwise vessels not engaged on coastwise voyages from the comprehensive "burdensome requirements" of the Shipping Act, this one conflict does not seem sufficient to preempt California's overtime laws. Inter-Island Steam Nav. Co. v. Byrne, 239 U.S. 459, 462-63, 36 S. Ct. 132, 133-34, 60 L. Ed. 382 (1915).[8] Maritime statutes simply do not purport to govern the overtime wages of employees such as those in this action.
1. FLSA v. State
Plaintiffs next contend that, to the extent that seamen or maritime employees are not covered by federal maritime statutes, they are covered by the FLSA. This argument is much more persuasive.
Section 207(a) of the FLSA provides overtime pay for employees who are engaged in "commerce or in the production of goods for commerce." Although neither side cites any evidence that the maritime employees here fall under the FLSA, it appears that the employees are tied closely enough to commerce (oil production) such that they are covered by the FLSA. Wirtz v. Intravaia, 375 F.2d 62, 65 (9th Cir.), cert. denied, 389 U.S. 844, 88 S. Ct. 90, 19 L. Ed. 2d 110 (1967); see also 29 U.S.C. § 206(4) (expressly applying minimum wage to seamen); Friedell, Benedict on Admiralty, ¶ 104, pp. 7-6.
The FLSA constitutes a comprehensive, uniform and national system of wage and hour regulation. It provides maritime employers and employees with a uniform legal standard by which to ascertain their legal rights and obligations. It specifically exempts maritime workers, i.e., seamen who are engaged primarily in the operation of a vessel. Further, the California overtime provisions and the FLSA provisions produce widely differing results. Plaintiffs contend that these conflicts establish that the FLSA preempts California labor provisions. In fact, the Labor Commissioner concedes that the FLSA would preempt state law, were it not for the FLSA's savings clause, 29 U.S.C. § 218(a).
2. The FLSA Savings Clause
The savings clause provides:
"No provision of this chapter or of any order thereunder shall excuse noncompliance with any Federal or State law or municipal ordinance establishing a minimum wage higher than the minimum wage established under this chapter or a maximum workweek lower than the maximum workweek established under this chapter...."
29 U.S.C. § 218(a). According to the Labor Commissioner, this savings clause expressly permits California to apply its overtime provisions (which are admittedly more generous) to those nonexempt maritime employees who qualify under the FLSA.
However, the FLSA's savings clause cannot properly be construed to save state laws that seek to regulate the employment of maritime employees whose work situs is a vessel normally situated on the high seas. This is so because Congress may not constitutionally delegate its maritime jurisdiction to the states. Knickerbocker Ice Co. v. Stewart, 253 U.S. 149, 40 S. Ct. 438, 64 L. Ed. 834 (1920); see also Perez De La Cruz v. Crowley Towing & Transp. Co., 807 F.2d 1084, 1088 (1st Cir. 1986), cert. denied, 481 U.S. 1050, 107 S. Ct. 2182, 95 L. Ed. 2d 838 (1987) (Congress cannot delegate its maritime jurisdiction to the states, but can delegate it to Puerto Rico). Such a delegation would destroy the harmony and uniformity of admiralty law established by the Constitution. Knickerbocker, *1525 253 U.S. at 164, 40 S. Ct. at 441. Thus, under compulsion of the Constitution, the savings clause must be interpreted as not applying to maritime employees employed primarily on the high seas.
Although this argument lacks direct precedential support, common sense suggests that the uniformity of federal admiralty law would be destroyed if the states were permitted to "add on" to the federal law enacted by Congress. The maritime employees (and their employers) involved in the present action fall in the interstices between express federal maritime statutes. Nonetheless, because they are maritime employees and therefore subject to admiralty jurisdiction, they must be subject to uniform federal law. Therefore, California cannot apply its laws under the savings clause to destroy the nationwide uniformity of admiralty law.
This limiting construction of the FLSA's savings clause is similar to and consistent with the Supreme Court's limiting construction of the savings clause in the National Labor Relations Act (NLRA), 29 U.S.C. § 164(b). In Oil, Chem. & Atomic Workers, Int'l Union, AFL-CIO v. Mobil Oil Corp., 426 U.S. 407, 96 S. Ct. 2140, 48 L. Ed. 2d 736 (1976), the Court adopted a "predominant job situs" test to determine when the NLRA's savings clause permits application of state "right-to-work" laws. Because the employees in Mobil Oil mostly worked on the high seas (outside the territorial bounds of the State of Texas), the Court held that Texas' right-to-work laws could not be applied to govern the agency-shop provision at issue. "It is therefore fully consistent with national labor policy to conclude, if the predominant job situs is outside the boundary of any State, that no State has a sufficient interest in the employment relationship and that no State's right-to-work laws can apply." Id. at 420-21, 96 S. Ct. at 2147.
Mobil Oil strongly suggests that the FLSA's savings clause should be limited so that California cannot apply its overtime provisions to employees whose predominant job situs is on the high seas, outside the territorial bounds of California. See also Offshore Logistics, Inc. v. Tallentire, 477 U.S. 207, 223-229, 106 S. Ct. 2485, 2495-2499, 91 L. Ed. 2d 174 (1986) (Death on the High Seas Act precludes application of state's wrongful death statute to accidents on the high seas despite savings clause preserving state statutory rights and remedies. "[W]e must infer that if Representative Mann and his colleagues intended affirmatively to require enforcement of state substantive law on the high seas, they would have taken care to make that requirement explicit.").
3. FLSA Exempt Seamen
Under the FLSA, seamen are exempt from federal overtime provisions. 29 U.S.C. § 213(b) (6). Federal law clearly preempts state law within the territorial zone if that state law conflicts with federal law. See, e.g., Chevron U.S.A. Inc. v. Hammond, 1980 A.M.C. 2416 (D. Alaska 1979). Congress has spoken directly on the issue of overtime pay for seamen. Therefore, California labor laws are preempted to the extent that they presume to regulate FLSA exempt seamen, both on the high seas and within the territorial zone. Further, given Congress' exemption of these seamen from even minimal federal overtime provisions, it would be at odds with the federal scheme to permit the states to enforce stricter overtime provisions via the FLSA's savings clause.
D. Supremacy Clause Preemption
Plaintiffs next contend that California's wage and hours laws are preempted by the Supremacy Clause because California cannot extend its territorial boundaries and exercise sovereignty over the high seas. Basically, they argue that by asserting jurisdiction over employment on the high seas, defendant has "enlarged" its territorial boundaries into areas within exclusive federal soverignty. The Labor Commissioner has not responded to this argument. It is, however, no more than a variation of the arguments discussed above, and so, needs no separate elaboration.
*1526 E. Interstate Commerce
Plaintiffs' final argument is that application of California's overtime provisions to vessels on the high seas places an unconstitutional burden on interstate and maritime commerce. This is but another variation on the theme discussed above. Plaintiffs contend that maritime employment on the high seas is so national in nature as to permit only one uniform system of regulation. Therefore, that any state law that intrudes on this area is preempted under the Supremacy Clause. While it does appear that California's "police power" interest is weak, in light of the need for uniform law governing employees on the high seas, the Court need not reach this commerce clause argument.
CONCLUSION
In light of the obvious conflict between California's overtime compensation provision and the FLSA, the FLSA preempts California's provisions. Therefore, California cannot apply its wage and hour provisions to seamen or to maritime employees employed primarily on the high seas. Plaintiffs' and intervenors' request for declaratory and injunctive relief is granted. However, the scope of the relief is limited to (i) the FLSA-exempt seamen, whether working within the territorial zone or on the high seas, and (ii) maritime employees working primarily on vessels on the high seas that are not engaged in foreign or intercoastal voyages.
DECLARATORY JUDGMENT AND PERMANENT INJUNCTION
In accordance with the Memorandum Opinion, signed and filed concurrently herewith,
IT IS ADJUDGED AND DECLARED that the provisions of California state law (statutes, regulations and orders) with respect to overtime pay of employees, and related enforcement provisions, may not be enforced or applied to seamen employees of plaintiffs' members and intervenors or to maritime employees of plaintiffs' members and intervenors who are employed primarily on the high seas. Such enforcement and application is inconsistent with and conflicts with the Fair Labor Standards Act and exclusive federal jurisdiction of admiralty and maritime law; therefore, state regulation of the same is preempted by the Supremacy Clause of the Constitution.
IT IS ORDERED AND ADJUDGED that defendant Lloyd W. Aubry, Jr., as Labor Commissioner of the State of California, his agents and successors, are permanently enjoined from applying or enforcing any provision of California law (statutes, regulations and orders) with respect to overtime pay of employees to seamen employees of plaintiffs' members and intervenors and to maritime employees of plaintiffs' members and intervenors who are employed primarily on the high seas.
FURTHER ORDERED that plaintiffs and intervenors shall recover their costs of suit in the sum of $____.
Improper Overtime Pay
Improper Computation of Overtime Pay
SKYLINE HOMES INC v. DEPARTMENT OF INDUSTRIAL RELATIONS DIVISION OF INDUSTRIAL SAFETY
SOURCE:
KEY WORDS:
Overtime Pay, Overtime Calculation, Improper Overtime Pay
AGENCY:
THE COURT OF APPEAL OF THE STATE OF CALIFORNIA, THIRD APPELLATE DISTRICT
ACTION:
DECIDED, JUNE 18TH 1981
3 Civ. 18717
CSKYLINE HOMES, INC., a California Corporation doing business as Buddy Mobile Homes, Plaintiff and Appellant, v. The OCCUPATIONAL SAFETY AND HEALTH APPEALS BOARD, DEPARTMENT OF INDUSTRIAL RELATIONS, State of California, Defendant and Respondent, DEPARTMENT OF INDUSTRIAL RELATIONS, DIVISION OF INDUSTRIAL SAFETY, State of California, Real Party in Interest and Respondent. | 3 Civ. 18717. Decided: June 19, 1981 |
_________________________
BACKGROUND
Reid, Babbage & Coil and David G. Moore, Riverside, and Ingoglia, Marskey & Kearney and Philip P. Marskey, Sacramento, for plaintiff and appellant. Robert A. Heron, Chief Counsel, Elise Manders and Keith Yamanaka, Sacramento, for defendant and respondent. Michael D. Mason, Acting Chief Counsel, and Paul Freud Wotman, Staff Counsel, San Francisco, for real party in interest and respondent.
Plaintiff argues that the manufacture of mobile homes is governed by the state's construction safety orders and not the general industry safety orders. We hold that in the construction of mobile homes in an assembly plant, as later described, the construction safety orders are inapplicable; accordingly, such a manufacturing operation is appropriately covered by the safety orders which apply to general industries. We affirm the trial court's denial of the petition for a writ of mandate.
Skyline Homes, Inc., a California corporation doing business as Buddy Mobile Homes, petitioned the Superior Court of Sacramento County for a writ of administrative mandate against the California Occupational Safety and Health Appeals Board, naming the Department of Industrial Relations and the Division of Industrial Safety as real parties in interest. Plaintiff sought relief from a penalty imposed upon it by the division and upheld by the appeals board in an administrative proceeding. The penalty was imposed for failure to provide safety devices for employees installing roofing materials on mobile homes at a height of approximately 12 feet.
I
On September 13, 1977, division compliance safety engineer Donald R. Cunningham visited plaintiff's plant after learning of an industrial accident. As the result of this visit a citation was issued charging 14 violations of safety rules. One alleged violation concerned the failure to provide guardrails for employees in the roof sheeting area and in the mezzanine and storage area. Plaintiff contested only the alleged violation for the failure to provide guardrails at the roof sheeting area.
The matter came on for hearing before an administrative law judge. At the hearing Cunningham testified that on his visit to the plant he observed three workers installing a sheet metal roof at a height of 12 feet without any safety device to prevent falls. Plaintiff did not deny that this situation existed, and in fact admitted that it was so.
Plaintiff's division manager testified regarding the manufacturing process used by plaintiff. As his testimony confirms, we deal with a manufacturing assembly plant. Plaintiff uses an assembly line process consisting of 15 work stations. The units move on a small trolley with an angle iron track. Separately constructed walls are hoisted and nailed to a previously built floor. The roof is then hoisted and nailed to the walls. At the work station where the roof is hoisted to the unit plaintiff has movable scaffolding with guardrails which is hoisted to surround the unit. That station is in compliance with department regulations.
The roofing process consists of setting the roof, electrical wiring, installing plywood sheeting and felt or tar papering, shingling and installation of roof jacks. Plaintiff has two roofing stations with protective scaffolding; however, often a portion of the roofing work is performed between the two stations where there are no protective devices. Thus, after the roof is hoisted and secured the unit is moved to a position without scaffolding where the plywood sheeting and felt or tar paper portion of the work is done. After that is completed the unit is moved to another area with protective scaffolding where the shingling is performed and the roof jacks installed.
Despite the fact that protective scaffolding is available at the point where the roofing is begun and at the point where it is finished, the plywood sheeting and the application of the felt or tar paper is often performed between these two stations without any protective devices. The reason for this is the volume of production at which plaintiff builds mobile homes. Plaintiff produces four units per day, which leaves only an hour and forty minutes per station. That time is spent hoisting and nailing down the roof at the first station, and is completely used for shingling and installation of roof jacks at the next. To keep the unit at either station where protective scaffolding is available would delay the manufacturing process, so the unit is moved to a point between the two stations for a portion of the roofing work.
The testimony turned from detailing the manufacturing process to the required protection for the workers. When asked what prevented the installation of scaffolding the division manager explained: “Well, as I indicated, now, we have the four scaffolds and catwalks there right now, and our operation was put into operation with a considerable cost. Now, I don't think we're prohibited by anything other than economics, from putting another scaffold there. I don't think that the scaffold in itself interferes with our operation but we just have four right now.”
John Best, a consulting engineer, who testified for plaintiff, outlined the types of protective devices which could be used. He described the scaffolding of the type now used as costly and having the potential for interfering somewhat with the production process. The burden of the testimony appears to be that it is the expense which persuaded the plaintiff not to install the required safety devices.
In light of the evidence plaintiff did not deny that it had not provided guardrails for certain employees working on the mobile home roofs, nor did it contend that it had provided any equivalent safety devices. Instead, plaintiff contended that it should not be required to provide guardrails or equivalent safety devices for those employees. The basis of this contention was plaintiff's belief that it should be subject to the department's construction safety rules, dealing with fixed structures, rather than the general industry safety rules.
The administrative law judge decided the matter contrary to plaintiff's contention and upheld the imposition of the penalty. Plaintiff was to be given a 60-day abatement period so that suitable guarding options could be explored. Plaintiff applied for reconsideration of the decision by the appeals board. The appeals board granted the petition for reconsideration and after reconsideration affirmed the decision of the administrative law judge. The board held that mobile home manufacturing is governed by the general industry safety orders and not by the construction safety orders. This proceeding in administrative mandate followed. [1]*
II
A. The Difference Between the General Industry Order and the Construction Safety Order
Plaintiff argues that the general industry safety orders are inapplicable to it and that the division and appeals board thus judged its operation under an erroneous standard. There is no argument that the evidence is insufficient to support the finding that it failed to comply with the general industry safety order set forth at title 8, California Administrative Code, section 3210, subdivision (a).
The applicable general industry safety order provides, “Guardrails shall be provided on all open sides of unenclosed roof openings, open and glazed sides of landings, balconies or porches, platforms, runways, ramps, or working levels more than 30 inches above the floor, ground or other working areas ... (Cal.Admin.Code, tit. 8, s 3210, subd. (a).) The construction safety orders relating to roofing hazards are more lenient, both in terms of the minimum height at which safety devices are required and in the types of devices which may be used. (See Cal.Admin.Code, tit. 8, s 1730.) Plaintiff contends that its employees applying the plywood and felt or tar paper to mobile home roofs should be considered engaged in roofing operations in the construction industry, for in that manner lesser safety precautions would be required.
The decision of the appeals board involved the interpretation and application of existing regulations. “In reviewing such an agency decision a court must determine whether the administrative agency applied the proper legal standard in evaluating the evidence before it. (Citation.) The interpretation of a regulation, like the interpretation of a statute, is, of course, a question of law (citations), and while an administrative agency's interpretation of its own regulation obviously deserves great weight (citations), the ultimate resolution of such legal questions rests with the courts. (Citations.)” (Carmona v. Division of Industrial Safety (1975) 13 Cal.3d 303, 310, 118 Cal.Rptr. 473, 530 P.2d 161.)
The regulations of the department are set forth in Title 8 of the California Administrative Code. There are a set of general industry safety orders which are applicable to all employments within the state over which the department has jurisdiction, except where specific industry safety orders govern. (Cal.Admin.Code, tit. 8 s 3202, subd. (a).) Where there are specific industry safety orders those orders control in any situation in which they are inconsistent with the general industry safety orders. (Ibid.)
The department has promulgated specific industry safety orders for the construction industry. (Cal.Admin.Code, tit. 8, ss 1500 et seq.) Those orders provide that at construction projects they take precedence over general safety orders that are inconsistent with them (with exceptions not relevant here); however machines, equipment, processes, and operations not specifically covered by those orders are governed by the general industry safety orders. (Cal.Admin.Code, tit. 8, s 1502, subds. (b) and (c).)
B. The General Industry Safety Order Applies
The issue before us is clearly framed: Is plaintiff's operation specifically covered by the construction industry safety orders? If so, then the division and the appeals board erred by applying an erroneous legal standard to plaintiff's conduct. If, not, then the general industry safety orders govern plaintiff's conduct and the proper legal standard was applied.
The construction safety orders specify the operations considered to be within the construction industry and thus governed by the construction safety orders as follows: “These orders establish minimum safety standards wherever employment exists in connection with the construction, alteration, painting, repairing, construction maintenance, renovation, removal, or wrecking of any fixed structure or its parts....” (Cal.Admin.Code, tit. 8, s 1502, subd. (a).) By its decision the appeals board determined that the mobile home industry does not come within this definition. That decision, as we have noted, is entitled to great weight in our consideration of this issue. (Carmona v. Division of Industrial Safety, supra, 13 Cal.3d at p. 310, 118 Cal.Rptr. 473, 530 P.2d 161.)
In addition to the weight to be given the agency's interpretation of its regulations, plaintiff is faced with a semantic difficulty. “Fixed” and “mobile” have opposite meanings; they are antonyms. (See Webster's Third New International Dictionary (1971) “Fixed ” at p. 861, “Mobile ” at p. 1450.) Thus it would seem anomalous for plaintiff to contend that the manufacture of a “mobile” home in an assembly plant is to be equated with the construction of a “fixed” structure.
Plaintiff points at length to all the similarities between mobile homes and other residential structures in support of its contention that construction safety rules apply to it. To be sure there are similarities; however, there are differences in methods of construction. The construction safety orders apply to the construction of “fixed structures.” Such a term connotes a structure fixed in place and built at the site where it is to remain. This connotation is reinforced by California Administrative Code, title 8, section 1502, subdivision (b), which provides that the construction safety rules apply “at construction projects.”
Plaintiff's manufacturing process employs an assembly line. Each unit is moved physically from station to station where segments of the work are performed. Each segment of the work on each unit is performed at the same location as every other unit. Thus, the units come to the employees rather than the employees going to the units. When assembled each unit is transported to the location where it will be used, and is capable of being transported again and again. Such a manufacturing process refutes plaintiff's contention that it is engaged in the construction of fixed structures.
After giving deference to the agency's interpretation of its own regulations, and in light of the above discussion, we cannot say that the appeals board or the trial court erred in holding that plaintiff is not governed by the construction safety orders. Plaintiff is thus governed by the general industry safety orders, and the proper standard was applied to plaintiff's conduct.
C. Recent Legislation does not Change our Conclusion
Plaintiff contends, however, that the Legislature has indicated an intent to treat the mobile home industry as more closely related to the building industry than to the general manufacturing industry. Plaintiff points to Chapter 194 of the Statutes of 1979 (Assem. Bill No. 1517), which amended certain statutory law concerning mobile homes. The changes wrought by that legislation, and the purposes, were summarized in the Legislative Counsel's Digest. The bill changes the definition of a mobile home from a “vehicle” to a transportable “structure”, and makes certain requirements applicable to trailer coaches applicable to mobile homes. The bill further permits an owner, and under certain conditions a dealer or manufacturer, to remove the wheels, wheel hubs, or axles from a mobile home. Finally, the bill precludes any person or entity from either requiring or precluding the owner from removing the wheels, wheel hubs, or axles from a mobile home.
While we perceive a legislative intent to treat mobile homes differently than vehicles, we do not perceive in Assembly Bill No. 1517 an intent to equate mobile homes with fixed structures. Indeed, the bill itself defines mobile homes as “transportable”, and hence not “fixed”, structures. We thus reject plaintiff's contention that the enactment of Assembly Bill No. 1517 requires the division or the appeals board to apply the construction safety rules to it.
We cannot agree that various decisions by the Federal Occupational Safety and Health Appeals Board require that the decision of the California appeals board herein be reversed. Congress has created a reverse preemptive scheme in its act. Any state that desires to assume responsibility for development and enforcement of occupational safety and health standards may do so, and so long as the state plan is as effective as the federal regulations the federal regulations are without any force or effect within the state. (29 U.S.C. ss 665, 667(b).) California has so assumed responsibility and federal law is thus inapplicable to the issue herein. Moreover, the decisions of the federal OSHA board cited by plaintiff concern regulations dissimilar to those with which we are concerned and are not persuasive.
The construction safety orders, plaintiff argues, would be sufficient to protect roofing employees in the mobile home industry. It is not our function to determine which safety standards would be adequate, or even preferable, since that is a matter entrusted to the department. The department has determined that the mobile home industry is best regulated under general industry standards and has promulgated a regulation which, properly interpreted, so provides. Unless that determination is unreasonable or constitutionally impermissible we must uphold it. We find that determination to be neither unreasonable nor constitutionally impermissible, and thus decline plaintiff's invitation to impose our own views on the department, the division, or the appeals board.
The regulations are not vague. Plaintiff argues that the interpretation of the construction safety regulations which would preclude application of those orders to the mobile home industry would render the regulations so uncertain and vague as to be unconstitutional in their application. Any contractor that builds a one to three-story building, the argument goes, cannot know whether that building will ever be detached from its foundations and moved and thus cannot know which safety orders apply to it. We believe a contractor that builds a building on the site where it is intended to remain in a manner and with the intention that it will be a fixed structure will be governed by the construction safety rules despite the fact that in some unforeseeable manner the building might at some future time be moved. Conversely, a person that manufactures on an assembly line a movable item with the intention that the item will be removed from the premises before being used will not be governed by the construction safety rules. We find nothing ambiguous or uncertain in the regulations.
D. The Administrative Agency's Factual Determination
We finally address, and reject, plaintiff's contention that the trial court, and ultimately this court, are the “final arbiters” of all factual questions presented. Pursuant to the statutory scheme of the Occupational Safety and Health Act the courts sit only in review of the decisions of the appeals board, and with a limited scope of review. Factual determinations of the appeals board will not be overturned where they are supported by substantial evidence. (Lab.Code, ss 6629, 6630.) And actions of the department, the division, and the appeals board will not be interfered with where they are not beyond the agency's powers, are not unreasonable, and are not constitutionally impermissible. (Lab.Code, s 6629.) Since we find that the appeals board did not err in interpreting the construction safety rules to be inapplicable to the mobile home industry and further find no barriers to the enforcement of such rules, we must affirm the judgment of the trial court.
The judgment is affirmed.
CA Supreme Court Rest and Meal Break
CA Supreme Court Rules on Employer Meal and Rest Break ObligationsBrinker Restaurant Corp. v. Super. Ct.
SOURCE:
KEY WORDS:
Meal Breaks, Rest breaks, Labor Law
AGENCY:
The Supreme Court of California
S166350
BRINKER RESTAURANT CORPORATION et al., Petitioners, v. THE SUPERIOR COURT OF SAN DIEGO COUNTY, Respondent; ADAM HOHNBAUM et al., Real Parties in Interest. | 53 Cal. 4th 1004 (2012) 139 Cal. Rptr. 3d 315 273 P.3d 513 No. S166350. Supreme Court of California. |
_________________________
OPINION
WERDEGAR, J.
For the better part of a century, California law has guaranteed to employees wage and hour protection, including meal and rest periods intended to ameliorate the consequences of long hours. For most of that time, only injunctive remedies were available for violations of meal and rest period guarantees. In 2000, however, both the Legislature and the Industrial Welfare Commission (IWC) adopted for the first time monetary remedies for the denial of meal and rest breaks. (Murphy v. Kenneth Cole Productions, Inc. (2007) 40 Cal. 4th 1094, 1105-1106 [56 Cal. Rptr. 3d 880, 155 P.3d 284].) These remedies engendered a wave of wage and hour class action litigation, including the instant suit in which the trial court granted class certification and the Court of Appeal then issued writ relief and ordered three subclasses decertified.
(1) We granted review to consider issues of significance to class actions generally and to meal and rest break class actions in particular. We conclude, contrary to the Court of Appeal, that trial courts are not obligated as a matter of law to resolve threshold disputes over the elements of a plaintiff's claims, unless a particular determination is necessarily dispositive of the certification question. Because the parties have so requested, however, we nevertheless address several such threshold disputes here. On the most contentious of these, the nature of an employer's duty to provide meal periods, we conclude an employer's obligation is to relieve its employee of all duty, with the employee thereafter at liberty to use the meal period for whatever purpose he or she desires, but the employer need not ensure that no work is done.
(2) On the ultimate question of class certification, we review the trial court's ruling for abuse of discretion. In light of the substantial evidence submitted by plaintiffs of defendants' uniform policy, we conclude the trial court properly certified a rest break subclass. On the question of meal break subclass certification, we remand to the trial court for reconsideration. With respect to the third contested subclass, covering allegations that employees were required to work "off-the-clock," no evidence of common policies or means of proof was supplied, and the trial court therefore erred in certifying a subclass. Accordingly, because the Court of Appeal rejected certification of all three subclasses, we will affirm in part, reverse in part, and remand for further proceedings.
FACTUAL AND PROCEDURAL BACKGROUND
Defendants Brinker Restaurant Corporation, Brinker International, Inc., and Brinker International Payroll Company, L.P. (collectively Brinker), own and operate restaurants throughout California, including Chili's Grill & Bar and Maggiano's Little Italy. Brinker previously has owned and operated additional chains in California, including Romano's Macaroni Grill, Corner Bakery Cafe, Cozymel's Mexican Grill, and On the Border Mexican Grill & Cantina. Name plaintiffs Adam Hohnbaum, Illya Haase, Romeo Osorio, Amanda June Rader, and Santana Alvarado (collectively Hohnbaum) are or were hourly nonexempt employees at one or more of Brinker's restaurants.
(3) State law obligates employers to afford their nonexempt employees meal periods and rest periods during the workday. (See Lab. Code, §§ 226.7, 512; IWC wage order No. 5-2001 (Cal. Code Regs., tit. 8, § 11050); hereafter Wage Order No. 5.)[1] Labor Code section 226.7, subdivision (a)[2] prohibits an employer from requiring an employee "to work during any meal or rest period mandated by an applicable order of the Industrial Welfare Commission." In turn, Wage Order No. 5, subdivision 12 prescribes rest periods, while subdivision 11, as well as section 512 of the Labor Code, prescribes meal periods. Employers who violate these requirements must pay premium wages. (§ 226.7, subd. (b); Wage Order No. 5, subds. 11(B), 12(B); see Murphy v. Kenneth Cole Productions, Inc., supra, 40 Cal.4th at p. 1114.)
In 2002, the Division of Labor Standards Enforcement (DLSE) launched an investigation into whether Brinker was complying with its obligations to provide rest and meal breaks, maintain proper records, and pay premium wages in the event required breaks were not provided. The DLSE filed suit and eventually settled in exchange for Brinker's payment of $10 million to redress injuries suffered by employees between 1999 and 2001 and the stipulation to a court-ordered injunction to ensure compliance with meal and rest break laws. In connection with the settlement, Brinker disclaimed all liability.
In the aftermath of the DLSE's suit, Hohnbaum filed this putative class action, seeking to represent the cooks, stewards, buspersons, wait staff, host staff, and other hourly employees who staff Brinker's restaurants. The operative complaint, the first amended complaint, alleges in its first cause of action that Brinker failed to provide employees the rest breaks, or premium wages in lieu of rest breaks, due them under law. (See § 226.7; Wage Order No. 5, subd. 12.) The second cause of action alleges Brinker failed to provide employees the meal breaks, or premium wages in lieu of meal breaks, required by law. (See §§ 226.7, 512; Wage Order No. 5, subd. 11.) In the course of litigation, two distinct theories underlying the meal break claim have emerged: (1) Brinker provided employees fewer meal periods than required by section 512 and Wage Order No. 5 and (2) Brinker sometimes required "early lunching," a single meal period soon after the beginning of a work shift followed by six, seven, eight, or more hours without an additional meal period. Finally, Hohnbaum contends Brinker required employees to work off-the-clock during meal periods and engaged in time shaving, unlawfully altering employee time records to misreport the amount of time worked and break time taken.[3]
In aid of a court-ordered mediation, the parties stipulated to the trial court's resolving the legal issue central to the early lunching theory: whether state law imposes timing requirements on when a meal period must be provided and, if so, what it requires. Hohnbaum contended governing law obligates an employer to provide a 30-minute meal period at least once every five hours. Brinker countered that no such timing obligation is imposed, and an employer satisfies its meal period obligations by providing one meal period for shifts over five hours and two meal periods for shifts over 10 hours.
The trial court generally agreed with Hohnbaum, holding that an employer's obligations are not satisfied simply by affording a meal period for each work shift longer than five hours, and that affording a meal period during the first hour of a 10-hour shift, with nothing during the remaining nine hours, would violate the obligation to provide a meal period for each five-hour work period. This advisory opinion subsequently was confirmed as a court order. Brinker filed a writ petition in the Court of Appeal, which was denied.
Hohnbaum then moved for class certification, defining the class as "[a]ll present and former employees of [Brinker] who worked at a Brinker owned restaurant in California, holding a non-exempt position, from and after August 16, 2000."[4] The class definition included several subclasses, three of which are pertinent here: (1) a "`Rest Period Subclass'" comprising all "Class Members who worked one or more work periods in excess of three and a half (3.5) hours without receiving a paid 10 minute break during which the Class Member was relieved of all duties, from and after October 1, 2000"; (2) a "`Meal Period Subclass'" covering all "Class Members who worked one or more work periods in excess of five (5) consecutive hours, without receiving a thirty (30) minute meal period during which the Class Member was relieved of all duties, from and after October 1, 2000"; and (3) an "`Off-The-Clock' Subclass" for all "Class Members who worked `off-the-clock' or without pay from and after August 16, 2000."
Hohnbaum argued class certification was warranted because, inter alia, common legal and factual issues predominated. He contended Brinker applied common meal and rest break policies to all nonexempt employees, the legality of these common policies was most appropriately decided on a classwide basis, and computer shift records maintained by Brinker could be used to identify violations and establish classwide liability. Hohnbaum supported the motion with numerous declarations from proposed class members asserting that Brinker had failed to provide individuals with meal and rest breaks or provided breaks at allegedly improper times during the course of an employee's work shift. He also submitted survey evidence of ongoing meal and rest break violations even after settlement with the DLSE.
Brinker opposed class certification, arguing that individual issues predominated. Specifically, Brinker argued that a rest break subclass should not be certified because an employer's obligation is simply to permit such breaks to be taken, as Brinker did, and whether employees in fact chose to take such breaks is an individualized inquiry not amenable to class treatment. Brinker contended a meal period subclass should not be certified because an employer is obliged only to make meal breaks available and need not ensure that employees take such breaks. Brinker asserted it had complied with its legal obligation to make meal breaks available, many employees took those breaks, and inquiry into why particular employees did not take meal breaks raised individual questions precluding class treatment. Brinker also contended plaintiffs' early lunching claims were legally unfounded and, in any event, individual issues again predominated, rendering the meal period claims unsuitable for litigation on a class basis. Finally, Brinker argued the off-the-clock subclass should not be certified because no Brinker policy permitted such alteration of time records, Brinker did not suffer or permit off-the-clock work, and any such off-the-clock work would require individualized employee-by-employee proof. Brinker submitted hundreds of declarations in support of its opposition to class certification.
Following a full hearing, the trial court granted class certification, finding that common issues predominated over individual issues: "[C]ommon questions regarding the meal and rest period breaks are sufficiently pervasive to permit adjudication in this one class action. [¶] [Brinker's] arguments regarding the necessity of making employees take meal and rest periods actually point[] toward a common legal issue of what [Brinker] must do to comply with the Labor Code. Although a determination that [Brinker] need not force employees to take breaks may require some individualized discovery, the common alleged issues of meal and rest violations predominate." A class proceeding was also superior: "Adjudicating plaintiffs' allegations in one litigation" would be "much more efficient" than resolving it in 60,000 separate administrative or judicial proceedings, as Brinker had suggested.
The Court of Appeal granted writ relief and reversed class certification as to the three disputed subclasses. We granted review to resolve uncertainties in the handling of wage and hour class certification motions.
DISCUSSION
I. Class Certification Principles
(4) Originally creatures of equity, class actions have been statutorily embraced by the Legislature whenever "the question [in a case] is one of a common or general interest, of many persons, or when the parties are numerous, and it is impracticable to bring them all before the court . . . ." (Code Civ. Proc., § 382; see Fireside Bank v. Superior Court (2007) 40 Cal. 4th 1069, 1078 [56 Cal. Rptr. 3d 861, 155 P.3d 268]; City of San Jose v. Superior Court (1974) 12 Cal. 3d 447, 458 [115 Cal. Rptr. 797, 525 P.2d 701].) (5) Drawing on the language of Code of Civil Procedure section 382 and federal precedent, we have articulated clear requirements for the certification of a class. The party advocating class treatment must demonstrate the existence of an ascertainable and sufficiently numerous class, a well-defined community of interest, and substantial benefits from certification that render proceeding as a class superior to the alternatives. (Code Civ. Proc., § 382; Fireside Bank, at p. 1089; Linder v. Thrifty Oil Co. (2000) 23 Cal. 4th 429, 435 [97 Cal. Rptr. 2d 179, 2 P.3d 27]; City of San Jose, at p. 459.) "In turn, the `community of interest requirement embodies three factors: (1) predominant common questions of law or fact; (2) class representatives with claims or defenses typical of the class; and (3) class representatives who can adequately represent the class.'" (Fireside Bank, at p. 1089, quoting Richmond v. Dart Industries, Inc. (1981) 29 Cal. 3d 462, 470 [174 Cal. Rptr. 515, 629 P.2d 23].)
(6) Here, only a single element of class suitability, and a single aspect of the trial court's certification decision, is in dispute: whether individual questions or questions of common or general interest predominate. The "ultimate question" the element of predominance presents is whether "the issues which may be jointly tried, when compared with those requiring separate adjudication, are so numerous or substantial that the maintenance of a class action would be advantageous to the judicial process and to the litigants." (Collins v. Rocha (1972) 7 Cal. 3d 232, 238 [102 Cal. Rptr. 1, 497 P.2d 225]; accord, Sav-On Drug Stores, Inc. v. Superior Court (2004) 34 Cal. 4th 319, 326 [17 Cal. Rptr. 3d 906, 96 P.3d 194].) The answer hinges on "whether the theory of recovery advanced by the proponents of certication is, as an analytical matter, likely to prove amenable to class treatment." (Sav-On, at p. 327.) A court must examine the allegations of the complaint and supporting declarations (ibid.) and consider whether the legal and factual issues they present are such that their resolution in a single class proceeding would be both desirable and feasible.[5] "As a general rule if the defendant's liability can be determined by facts common to all members of the class, a class will be certified even if the members must individually prove their damages." (Hicks v. Kaufman & Broad Home Corp. (2001) 89 Cal. App. 4th 908, 916 [107 Cal. Rptr. 2d 761]; accord, Knapp v. AT&T Wireless Services, Inc. (2011) 195 Cal. App. 4th 932, 941 [124 Cal. Rptr. 3d 565].)
On review of a class certification order, an appellate court's inquiry is narrowly circumscribed. "The decision to certify a class rests squarely within the discretion of the trial court, and we afford that decision great deference on appeal, reversing only for a manifest abuse of discretion: `Because trial courts are ideally situated to evaluate the efficiencies and practicalities of permitting group action, they are afforded great discretion in granting or denying certification.' [Citation.] A certification order generally will not be disturbed unless (1) it is unsupported by substantial evidence, (2) it rests on improper criteria, or (3) it rests on erroneous legal assumptions. [Citations.]" (Fireside Bank v. Superior Court, supra, 40 Cal.4th at p. 1089; see also Hamwi v. Citinational-Buckeye Inv. Co. (1977) 72 Cal. App. 3d 462, 472 [140 Cal. Rptr. 215] ["So long as [the trial] court applies proper criteria and its action is founded on a rational basis, its ruling must be upheld."].) Predominance is a factual question; accordingly, the trial court's finding that common issues predominate generally is reviewed for substantial evidence. (Sav-On Drug Stores, Inc. v. Superior Court, supra, 34 Cal.4th at pp. 328-329.) We must "[p]resum[e] in favor of the certification order . . . the existence of every fact the trial court could reasonably deduce from the record . . . ." (Id. at p. 329.)
The appellate judgment reversing certification rests on two separate grounds. First, the Court of Appeal held the trial court committed error per se by ruling on certification without first resolving legal disputes over the scope of Brinker's duties to provide meal and rest periods. Second, it held that any court, upon resolving those disputes, could only have concluded certification was inappropriate. We consider the first of these grounds in part II., post, and the second of them in parts IV. through VI., post. As we shall explain, the first ground does not support the judgment, while the second supports it only partially.
II. Class Certification and Disputes over a Claim's Elements
The trial court concluded it could certify a class without resolving disputes over the scope of Brinker's duty to provide breaks because common questions would predominate even if Brinker's legal positions were correct. According to the Court of Appeal, this was error: the trial court "was required to determine the elements of plaintiffs' claims" because the court "could not determine whether individual or common issues predominate in this case, and thus whether a class action was proper, without first determining this threshold issue." While we agree trial courts must resolve any legal or factual issues that are necessary to a determination whether class certification is proper, the Court of Appeal went too far by intimating that a trial court must as a threshold matter always resolve any party disputes over the elements of a claim. In many instances, whether class certification is appropriate or inappropriate may be determined irrespective of which party is correct. In such circumstances, it is not an abuse of discretion to postpone resolution of the disputed issue.
(7) "The certification question is `essentially a procedural one that does not ask whether an action is legally or factually meritorious.'" (Sav-On Drug Stores, Inc. v. Superior Court, supra, 34 Cal.4th at p. 326, quoting Linder v. Thrifty Oil Co., supra, 23 Cal.4th at pp. 439-440; see also Eisen v. Carlisle & Jacquelin (1974) 417 U.S. 156, 178 [40 L. Ed. 2d 732, 94 S. Ct. 2140] ["`In determining the propriety of a class action, the question is not whether the plaintiff or plaintiffs have stated a cause of action or will prevail on the merits, but rather whether the requirements of [class certification] are met.'"].) A class certification motion is not a license for a free-floating inquiry into the validity of the complaint's allegations; rather, resolution of disputes over the merits of a case generally must be postponed until after class certification has been decided (Fireside Bank v. Superior Court, supra, 40 Cal.4th at pp. 1083-1086), with the court assuming for purposes of the certification motion that any claims have merit (Linder, at p. 443).
(8) We have recognized, however, that "issues affecting the merits of a case may be enmeshed with class action requirements . . . ." (Linder v. Thrifty Oil Co., supra, 23 Cal.4th at p. 443; see also Wal-Mart Stores, Inc. v. Dukes (2011) 564 U.S. ___, ___ [180 L. Ed. 2d 374, 131 S. Ct. 2541, 2551] [Analysis of a class certification's propriety "[f]requently . . . will entail some overlap with the merits of the plaintiff's underlying claim. That cannot be helped."]; Coopers & Lybrand v. Livesay (1978) 437 U.S. 463, 469, fn. 12 [57 L. Ed. 2d 351, 98 S. Ct. 2454] ["`Evaluation of many of the questions entering into determination of class action questions is intimately involved with the merits of the claims.'"].) When evidence or legal issues germane to the certification question bear as well on aspects of the merits, a court may properly evaluate them. (Wal-Mart Stores, 564 U.S. at pp. ___-___ & fn. 6 [131 S.Ct. at pp. 2551-2552 & fn. 6]; Ghazaryan v. Diva Limousine, Ltd. (2008) 169 Cal. App. 4th 1524, 1531 [87 Cal. Rptr. 3d 518]; Caro v. Proctor & Gamble Co. (1993) 18 Cal. App. 4th 644, 656 [22 Cal. Rptr. 2d 419].) The rule is that a court may "consider[] how various claims and defenses relate and may affect the course of the litigation" even though such "considerations . . . may overlap the case's merits." (Fireside Bank v. Superior Court, supra, 40 Cal.4th at p. 1092; see Szabo v. Bridgeport Machines, Inc. (7th Cir. 2001) 249 F.3d 672, 676 [if the considerations necessary to certification "overlap the merits. . . then the judge must make a preliminary inquiry into the merits"].)
(9) In particular, whether common or individual questions predominate will often depend upon resolution of issues closely tied to the merits. (Coopers & Lybrand v. Livesay, supra, 437 U.S. at p. 469, fn. 12; Linder v. Thrifty Oil Co., supra, 23 Cal.4th at p. 443.) To assess predominance, a court "must examine the issues framed by the pleadings and the law applicable to the causes of action alleged." (Hicks v. Kaufman & Broad Home Corp., supra, 89 Cal.App.4th at p. 916.) It must determine whether the elements necessary to establish liability are susceptible of common proof or, if not, whether there are ways to manage effectively proof of any elements that may require individualized evidence. (See Sav-On Drug Stores, Inc. v. Superior Court, supra, 34 Cal.4th at p. 334.) In turn, whether an element may be established collectively or only individually, plaintiff by plaintiff, can turn on the precise nature of the element and require resolution of disputed legal or factual issues affecting the merits. For example, whether reliance or a breach of duty can be demonstrated collectively or poses insuperable problems of individualized proof may be determinable only after closer inspection of the nature of the reliance required or duty owed and, in some instances, resolution of legal or factual disputes going directly to the merits. (See, e.g., Erica P. John Fund, Inc. v. Halliburton Co. (2011) 563 U.S. ___, ___ [180 L. Ed. 2d 24, 131 S. Ct. 2179, 2184-2186]; Bartold v. Glendale Federal Bank (2000) 81 Cal. App. 4th 816, 829-831 [97 Cal. Rptr. 2d 226].)
(10) Such inquiries are closely circumscribed. As the Seventh Circuit has correctly explained, any "peek" a court takes into the merits at the certification stage must "be limited to those aspects of the merits that affect the decisions essential" to class certification. (Schleicher v. Wendt (7th Cir. 2010) 618 F.3d 679, 685.) While the Schleicher defendants urged that the trial court had erred by failing to resolve disputes over the falsity and materiality of their statements, the Seventh Circuit affirmed class certification without inquiry into such matters, concluding no element of the certification determination hinged on their resolution. (Ibid.) Likewise, in Jaimez v. Daiohs USA, Inc. (2010) 181 Cal. App. 4th 1286, 1303-1305 [105 Cal. Rptr. 3d 443], the Court of Appeal reversed the trial court's refusal to certify a wage and hour class without deciding contested legal issues concerning the defendant's meal break policy because common questions predominated in any event. (See also Medrazo v. Honda of North Hollywood (2008) 166 Cal. App. 4th 89, 97-98 [82 Cal. Rptr. 3d 1] [trial court erred in resolving the merits of an affirmative defense divorced from consideration of the specific criteria for class certification].)
(11) We summarize the governing principles. Presented with a class certification motion, a trial court must examine the plaintiff's theory of recovery, assess the nature of the legal and factual disputes likely to be presented, and decide whether individual or common issues predominate. To the extent the propriety of certification depends upon disputed threshold legal or factual questions, a court may, and indeed must, resolve them. Out of respect for the problems arising from one-way intervention, however, a court generally should eschew resolution of such issues unless necessary. (See Fireside Bank v. Superior Court, supra, 40 Cal.4th at p. 1074; Schleicher v. Wendt, supra, 618 F.3d at p. 685.) Consequently, a trial court does not abuse its discretion if it certifies (or denies certification of) a class without deciding one or more issues affecting the nature of a given element if resolution of such issues would not affect the ultimate certification decision.[6]
(12) In support of its conclusion that a trial court must always first decide upon the applicable law and resolve legal issues surrounding each element of a proposed class claim, the Court of Appeal relied principally on our decision in Washington Mutual Bank v. Superior Court (2001) 24 Cal. 4th 906 [103 Cal. Rptr. 2d 320, 15 P.3d 1071]. We disagree with the Court of Appeal's reading of our decision. In Washington Mutual, the plaintiffs sought certification of a nationwide class. Although members of the plaintiff class were subject to choice-of-law agreements, the trial court granted certification without first determining whether the agreements were enforceable and would result in the application of different state laws, and whether any applicable state laws varied in ways that would render the class proceeding unmanageable. We reversed, explaining that it was not possible to intelligently assess predominance and the manageability of claims asserted on behalf of nonresidents without those determinations. (Washington Mutual, at pp. 915, 922, 927-928.) Washington Mutual involves an unexceptional application of the principles we have articulated: if the presence of an element necessary to certification, such as predominance, cannot be determined without resolving a particular legal issue, the trial court must resolve that issue at the certification stage. That the failure to resolve disputed legal issues affecting the elements of a claim is always reversible error does not follow.
III. Wage Orders and the Labor Code
We turn to the Court of Appeal's alternate basis for reversing class certificationthat if one considers the substance of the parties' various legal disputes and the elements of Hohnbaum's claims, one must conclude as a matter of law that common questions do not predominate. In assessing that conclusion, at the parties' request we examine the merits of their substantive legal disputes. (See Linder v. Thrifty Oil Co., supra, 23 Cal.4th at p. 443 ["[W]e see nothing to prevent a court from considering the legal sufficiency of claims when ruling on certification where both sides jointly request such action."].) Because those disputes derive in part from conflicting visions of the respective roles statutes and wage orders play in establishing the state's wage and hour law, we begin by examining those roles.
(13) Nearly a century ago, the Legislature responded to the problem of inadequate wages and poor working conditions by establishing the IWC and delegating to it the authority to investigate various industries and promulgate wage orders fixing for each industry minimum wages, maximum hours of work, and conditions of labor. (Martinez v. Combs, supra, 49 Cal.4th at pp. 52-55; see Cal. Const., art. XIV, § 1 [confirming the Legislature's authority to establish a commission and grant it legislative and other powers over such matters].) Pursuant to its "broad statutory authority" (Industrial Welfare Com. v. Superior Court (1980) 27 Cal. 3d 690, 701 [166 Cal. Rptr. 331, 613 P.2d 579]), the IWC in 1916 began issuing industry- and occupation-wide wage orders specifying minimum requirements with respect to wages, hours, and working conditions (id. at p. 700). In addition, the Legislature has from time to time enacted statutes to regulate wages, hours, and working conditions directly. Consequently, wage and hour claims are today governed by two complementary and occasionally overlapping sources of authority: the provisions of the Labor Code, enacted by the Legislature, and a series of 18 wage orders, adopted by the IWC. (Reynolds v. Bement (2005) 36 Cal. 4th 1075, 1084 [32 Cal. Rptr. 3d 483, 116 P.3d 1162]; see IWC wage orders Nos. 1-2001 to 17-2001 and MW-2007 (Cal. Code Regs., tit. 8, §§ 11000-11170).)
(14) We apply the usual rules of statutory interpretation to the Labor Code, beginning with and focusing on the text as the best indicator of legislative purpose. (Murphy v. Kenneth Cole Productions, Inc., supra, 40 Cal.4th at p. 1103.) "[I]n light of the remedial nature of the legislative enactments authorizing the regulation of wages, hours and working conditions for the protection and benefit of employees, the statutory provisions are to be liberally construed with an eye to promoting such protection." (Industrial Welfare Com. v. Superior Court, supra, 27 Cal.3d at p. 702; see also Murphy, at p. 1103 [given the Legislature's remedial purpose, "statutes governing conditions of employment are to be construed broadly in favor of protecting employees"].)
(15) In turn, the IWC's wage orders are entitled to "extraordinary deference, both in upholding their validity and in enforcing their specific terms." (Martinez v. Combs, supra, 49 Cal.4th at p. 61.) When a wage order's validity and application are conceded and the question is only one of interpretation, the usual rules of statutory interpretation apply. (Collins v. Overnite Transportation Co. (2003) 105 Cal. App. 4th 171, 178-179 [129 Cal. Rptr. 2d 254]; see Cal. Drive-in Restaurant Assn. v. Clark (1943) 22 Cal. 2d 287, 292 [140 P.2d 657].) As with the Labor Code provisions at issue, the meal and rest period requirements we must construe "have long been viewed as part of the remedial worker protection framework." (Murphy v. Kenneth Cole Productions, Inc., supra, 40 Cal.4th at p. 1105.) Accordingly, the relevant wage order provisions must be interpreted in the manner that best effectuates that protective intent. (Martinez, at pp. 61-62; see Industrial Welfare Com. v. Superior Court, supra, 27 Cal.3d at p. 724; Bono Enterprises, Inc. v. Bradshaw (1995) 32 Cal. App. 4th 968, 974 [38 Cal. Rptr. 2d 549].)
(16) The IWC's wage orders are to be accorded the same dignity as statutes. They are "presumptively valid" legislative regulations of the employment relationship (Martinez v. Combs, supra, 49 Cal.4th at p. 65), regulations that must be given "independent effect" separate and apart from any statutory enactments (id. at p. 68). To the extent a wage order and a statute overlap, we will seek to harmonize them, as we would with any two statutes. (Cal. Drive-in Restaurant Assn. v. Clark, supra, 22 Cal.2d at pp. 292-293.)
Here, Wage Order No. 5, governing the public housekeeping industry, applies.[7] We consider in turn both the scope of the duties it and several related statutes (see §§ 226.7, 512, 516) impose on restaurant employers to afford rest and meal periods, and whether in light of those duties the Court of Appeal erred in reversing as an abuse of discretion the trial court's certification of three subclasses.[8]
IV. Rest Period Class Certification
A. The Scope of an Employer's Duty to Provide Rest Periods
Preliminary to its assessment of the trial court's certification of a rest period subclass, the Court of Appeal addressed two threshold legal questions: the amount of rest time that must be authorized, and the timing of any rest periods. We consider these same two questions.
1. The rate at which rest time must be authorized and permitted
Brinker's rest period duties are defined solely by Wage Order No. 5, subdivision 12. To determine the rate at which rest time must be authorized, we begin, as always, with the text. (See Reynolds v. Bement, supra, 36 Cal.4th at p. 1086 ["The best indicator of [the IWC's] intent is the language of the [wage order] provision itself."].) Subdivision 12(A) provides in relevant part: "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 at the rate of ten (10) minutes net rest time per four (4) hours or major fraction thereof. However, a rest period need not be authorized for employees whose total daily work time is less than three and one-half (3½) hours."
(17) The text of the wage order is dispositive; it defines clearly how much rest time must be authorized. Under Wage Order No. 5, subdivision 12(A)'s second sentence, employees receive 10 minutes for each four hours of work "or major fraction thereof." Though not defined in the wage order, a "major fraction" long has been understoodlegally, mathematically, and linguisticallyto mean a fraction greater than one-half.[9] The term "majority fraction" was first introduced in 1947 and then amended to "major fraction" in 1952;[10] the contemporaneous historical evidence suggests the IWC in the 1940's understood the term in just such a sense. (See, e.g., IWC meeting mins. (June 14, 1943) p. 22 [interpreting "`any fraction of fifteen minutes'" to mean "the majority fraction thereof, or eight minutes or more"].) The Division of Labor Standards Enforcement (DLSE) has so interpreted the phrase as well, construing "major fraction thereof" as applied to a four-hour period to mean any amount of time in excess of two hoursi.e., any fraction greater than half. (Dept. Industrial Relations, DLSE Opn. Letter No. 1999.02.16 (Feb. 16, 1999) p. 1.)[11]
(18) It follows that Wage Order No. 5, subdivision 12(A)'s second sentence defines the rest time that must be permitted as 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 10 minutes. Thus, under the initial calculation called for by this part of the wage order, an employee would receive no rest break time for shifts of two hours or less, 10 minutes for shifts lasting more than two hours up to six hours, 20 minutes for shifts lasting more than six hours up to 10 hours, and so on.
Though under the basic calculation the right to 10 minutes' rest would accrue for any shift lasting more than two hours, the third sentence of Wage Order No. 5's rest period subdivision modifies this entitlement slightly. Under the third sentence, "a rest period need not be authorized for employees whose total daily work time is less than three and one-half (3½) hours." (Wage Order No. 5, subd. 12(A).) Thus, employees working shifts lasting over two hours but under three and one-half hours, who otherwise would have been entitled to 10 minutes' rest, need not be permitted a rest period. The combined effect of the two pertinent sentences, giving full effect to each, is this: 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.
The Court of Appeal, however, construed the third sentence of the subdivision as supplying the definition of "major fraction thereof," reasoning that otherwise the three and one-half hour proviso and the preceding language would be irreconcilable. In its view, employees are entitled to 10 minutes' rest for shifts of three and one-half hours or more, to 20 minutes' rest for shifts of seven and one-half hours or more, and so on. An employee working a seven-hour shift thus would be entitled to only 10 minutes' rest.
This reading cannot be reconciled with either the wage order's text or its adoption history. First, the express language of the three and one-half hour proviso speaks only to the circumstance where an employee's "total daily work time is less than three and one-half (3½) hours" (Wage Order No. 5, subd. 12(A), italics added); it does not speak to the circumstance where an employee's total daily work time is less than seven and one-half hours, or less than 11½ hours. "[M]ajor fraction" can be applied to, and must be defined for, each four-hour period, not just the first four hours of an employee's shift: How much time must be worked to earn a second 10 minutes, or a third? What does it mean to work four hours plus a "major fraction" of another four hours? The three and one-half hour proviso cannot answer those questions.
Second, the Court of Appeal's interpretation disregards the use of the word "However" at the beginning of the three and one-half hour proviso, which signals that what follows is a deviation from or exception to the previous rule, not an amplification of it. Though the Court of Appeal perceived an inconsistency, there is nothing inconsistent in reading the three and one-half hour proviso as a specific exception to the general rule that working for a "major fraction" of four hours is sufficient to entitle one to rest time: to earn the first 10 minutes, one must be scheduled for a work shift of at least three and one-half hours, while to earn the next 10 minutes, one must be scheduled to work four hours plus a major fraction, to earn the next, eight hours plus a major fraction, and so on.
The IWC's explanatory remarks at the time the three and one-half hour proviso was adopted reveal the proviso was intended as just such a limited exception: "`The rest period provision was clarified to indicate that an employee working less than 3½ hours for the entire day would not need to have a rest period.'" (IWC meeting mins. (May 16, 1952) p. 34.) The three and one-half hour proviso thus was not inserted as a definition of the phrase "major fraction," but simply as a limit on the shift length that would warrant any break at all.
Finally, the Court of Appeal attached great significance to a different 1952 change, the substitution in the wage order of "major" for "majority," but the two terms are essentially synonymous when used as modifiers, and the change appears to have been the product of an idiomatic choice, rather than an intended semantic distinction. (See also IWC wage order No. 5-57, subd. 15(a) (Nov. 15, 1957) [amending toilet requirements to mandate "one toilet for every twenty-five (25) female employees or major fraction thereof" in lieu of ". . . majority fraction thereof" with no evident change in meaning].)
Having resolved the amount of rest time an employer must authorize and permit, we turn to the question of when it must be afforded.
2. Rest period timing
Hohnbaum asserts employers have a legal duty to permit their employees a rest period before any meal period. Construing the plain language of the operative wage order, we find no such requirement and agree with the Court of Appeal, which likewise rejected this contention.
(19) Wage Order No. 5, subdivision 12(A) provides in relevant part: "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." Neither this part of the wage order nor subdivision 11, governing meal periods, speaks to the sequence of meal and rest breaks. The only constraint on timing is that rest breaks must fall in the middle of work periods "insofar as practicable." Employers are thus subject to a duty to make a good faith effort to authorize and permit rest breaks in the middle of each work period, but may deviate from that preferred course where practical considerations render it infeasible. At the certification stage, we have no occasion to decide, and express no opinion on, what considerations might be legally sufficient to justify such a departure.
The difficulty with Hohnbaum's argument that we should read into the wage order an absolute obligation to permit a rest period before a meal period can be illustrated by considering the case of an employee working a six-hour shift. Such an employee is entitled (in the absence of mutual waiver) to a meal period (Wage Order No. 5, subd. 11(A)) and, as discussed above, to a single rest period. Either the rest period must fall before the meal period or it must fall after. Neither text nor logic dictates an order for these, nor does anything in the policies underlying the wage and hour laws[12] compel the conclusion that a rest break at the two-hour mark and a meal break at the four-hour mark of such a shift is lawful, while the reverse, a meal break at the two-hour mark and a rest break at the four-hour mark, is per se illegal.
(20) Hohnbaum seeks to overcome the lack of textual support for his position by offering a DLSE opinion letter interpreting the identical language in a different wage order. (Dept. Industrial Relations, DLSE Opn. Letter No. 2001.09.17 (Sept. 17, 2001) [interpreting IWC wage order No. 16-2001 (Cal. Code Regs., tit. 8, § 11160)].) Responding to a hypothetical about an employer who affords employees a meal break at the five-hour mark of an eight-hour shift, the DLSE opined that "absent truly unusual circumstances," placing both rest breaks before the meal break, and none after, would not comport with the wage order requirement that rest breaks "`insofar as practicable, shall be in the middle of each work period.'" (DLSE Opn. Letter No. 2001.09.17, supra, at p. 4.) We have no reason to disagree with the DLSE's view regarding the scenario it considered, but that view does not establish universally the proposition that an employee's first rest break must always come sometime before his or her first meal break. Rather, in the context of an eight-hour shift, "[a]s a general matter," one rest break should fall on either side of the meal break. (Ibid.) Shorter or longer shifts and other factors that render such scheduling impracticable may alter this general rule.
B. Certification of a Rest Period Subclass
In granting class certification, the trial court accepted without modification the proposed class and subclass definitions. The rest period subclass covers "Class Members who worked one or more work periods in excess of three and a half (3.5) hours without receiving a paid 10 minute break during which the Class Member was relieved of all duties, from and after October 1, 2000 (`Rest Period Subclass')."
That the trial court did not apply improper criteria, i.e., decide certification on a basis other than whether superiority of the class action mechanism, commonality of issues, and other relevant factors had been shown, is undisputed. (See Sav-On Drug Stores, Inc. v. Superior Court, supra, 34 Cal.4th at p. 332; Walsh v. IKON Office Solutions, Inc. (2007) 148 Cal. App. 4th 1440, 1451 [56 Cal. Rptr. 3d 534].) Nor, as we have discussed, was the trial court obligated as a matter of law to resolve all legal disputes concerning the elements of Hohnbaum's rest break claims before certifying a class. (Ante, pt. II.) Hence, the only remaining question is whether the court abused its discretion in concluding that common questions predominate. We conclude it did not.
The issue for the trial court was whether any of the rest break theories of recovery advanced by Hohnbaum were "likely to prove amenable to class treatment." (Sav-On Drug Stores, Inc. v. Superior Court, supra, 34 Cal.4th at p. 327.) The complaint alleges Brinker failed "to provide rest periods for every four hours or major fraction thereof worked per day to non-exempt employees." Though Hohnbaum briefs multiple theories of liability, to conclude class certification was not an abuse of discretion we need consider only one: the theory that Brinker adopted a uniform corporate rest break policy that violates Wage Order No. 5 because it fails to give full effect to the "major fraction" language of subdivision 12(A).
(21) Hohnbaum presented evidence of, and indeed Brinker conceded at the class certification hearing the existence of, a common, uniform rest break policy. The rest break policy was established at Brinker's corporate headquarters; it is equally applicable to all Brinker employees. Under the written policy, employees receive one 10-minute rest break per four hours worked: "If I work over 3.5 hours during my shift, I understand that I am eligible for one ten minute rest break for each four hours that I work."[13] Classwide liability could be established through common proof if Hohnbaum were able to demonstrate that, for example, Brinker under this uniform policy refused to authorize and permit a second rest break for employees working shifts longer than six, but shorter than eight, hours. Claims alleging that a uniform policy consistently applied to a group of employees is in violation of the wage and hour laws are of the sort routinely, and properly, found suitable for class treatment. (See, e.g., Jaimez v. Daiohs USA, Inc., supra, 181 Cal.App.4th at pp. 1299-1305; Ghazaryan v. Diva Limousine, Ltd., supra, 169 Cal.App.4th at pp. 1533-1538; Bufil v. Dollar Financial Group, Inc. (2008) 162 Cal. App. 4th 1193, 1205-1208 [76 Cal. Rptr. 3d 804].)
(22) In reversing class certification, the Court of Appeal concluded that because rest breaks can be waivedas all parties agree"any showing on a class basis that plaintiffs or other members of the proposed class missed rest breaks or took shortened rest breaks would not necessarily establish, without further individualized proof, that Brinker violated" the Labor Code and Wage Order No. 5. This was error. An employer is required to authorize and permit the amount of rest break time called for under the wage order for its industry. If it does notif, for example, it adopts a uniform policy authorizing and permitting only one rest break for employees working a seven-hour shift when two are requiredit has violated the wage order and is liable. No issue of waiver ever arises for a rest break that was required by law but never authorized; if a break is not authorized, an employee has no opportunity to decline to take it. As Hohnbaum pleaded and presented substantial evidence of a uniform rest break policy authorizing breaks only for each full four hours worked, the trial court's certification of a rest break subclass should not have been disturbed.
We observe in closing that, contrary to the Court of Appeal's conclusion, the certifiability of a rest break subclass in this case is not dependent upon resolution of threshold legal disputes over the scope of the employer's rest break duties. The theory of liabilitythat Brinker has a uniform policy, and that that policy, measured against wage order requirements, allegedly violates the lawis by its nature a common question eminently suited for class treatment. As noted, we have at the parties' request addressed the merits of their threshold substantive disputes. However, in the general case to prematurely resolve such disputes, conclude a uniform policy complies with the law, and thereafter reject class certificationas the Court of Appeal did places defendants in jeopardy of multiple class actions, with one after another dismissed until one trial court concludes there is some basis for liability and in that case approves class certification. (See Fireside Bank v. Superior Court, supra, 40 Cal.4th at p. 1078.) It is far better from a fairness perspective to determine class certification independent of threshold questions disposing of the merits, and thus permit defendants who prevail on those merits, equally with those who lose on the merits, to obtain the preclusive benefits of such victories against an entire class and not just a named plaintiff. (Id. at p. 1083.)
V. Meal Period Class Certification
As with the rest break subclass, the Court of Appeal addressed two threshold legal issues before assessing whether certification of a subclass was proper: (1) the nature of an employer's duty to provide employees with meal periods and (2) the timing requirements applicable to the provision of meal periods. We likewise begin with these issues.
A. The Scope of the Employer Duty to Provide Meal Periods
1. The nature of the duty
(23) We consider what it means for an employer to provide a nonexempt employee a meal period. Hohnbaum contends an employer is obligated to "ensure that work stops for the required thirty minutes." Brinker, in a position adopted by the Court of Appeal, contends an employer is obligated only to "make available" meal periods, with no responsibility for whether they are taken. We conclude that under Wage Order No. 5 and Labor Code section 512, subdivision (a), an employer must relieve the employee of all duty for the designated period, but need not ensure that the employee does no work.
(24) Historically, an employer's meal period obligations were governed solely by the language of the IWC's wage orders, and so we begin there. Under Wage Order No. 5, subdivision 11(A), "[n]o employer shall employ any person for a work period of more than five (5) hours without a meal period of not less than 30 minutes . . ." absent a mutual waiver in certain limited circumstances. The wage order employs no verb between "without" and "a meal period" (e.g., providing, requiring, offering, allowing, granting) to specify the nature of the employer's duty. Rather, the order identifies only the condition triggering the employer's duty (employment of any person for at least five hours) and the employee's concomitant entitlement (a meal period of at least 30 minutes).
In the absence of a verb, the key language giving content to the employer's duty comes from the wage order's further definition of what an employee is to receive. Under Wage Order No. 5, subdivision 11(A), "[u]nless the employee is relieved of all duty during a 30 minute meal period, the meal period shall be considered an `on duty' meal period and counted as time worked. An `on duty' meal period shall be permitted only when the nature of the work prevents an employee from being relieved of all duty and when by written agreement between the parties an on-the-job paid meal period is agreed to. The written agreement shall state that the employee may, in writing, revoke the agreement at any time."
(25) Parsed, the order's text spells out the nature of "on duty" meal periods and the precise circumstances in which they are permitted. It follows that absent such circumstances, an employer is obligated to provide an "off-duty" meal period. The attributes of such off-duty meal periods are evident from the nature of their reciprocal, on duty meal periods. An on duty meal period is one in which an employee is not "relieved of all duty" for the entire 30-minute period. (Wage Order No. 5, subd. 11(A).) An off-duty meal period, therefore, is one in which the employee "is relieved of all duty during [the] 30 minute meal period." (Ibid., italics added.) Absent circumstances permitting an on duty meal period, an employer's obligation is to provide an off-duty meal period: an uninterrupted 30-minute period during which the employee is relieved of all duty.
The IWC's wage orders have long made a meal period's duty-free nature its defining characteristic. The 1943 version of the wage order governing restaurant employees first introduced the principle: "No employer shall employ any woman or minor for a work period of more than five (5) hours without an allowance of not less than thirty (30) minutes for a meal. If during such meal period the employee can not be relieved of all duties and permitted to leave the premises, such meal period shall not be deducted from hours worked." (IWC wage order No. 5 NS, subd. 3(d) (June 28, 1943).) The 1947 wage order retained the duty-free concept, but more clearly specified the circumstances under which an employer would be excused from relieving an employee: "An `on duty' meal period will be permitted only when the nature of the work prevents an employee from being relieved of all duty, and such `on duty' meal period shall be counted as hours worked without deduction from wages." (IWC wage order No. 5 R, subd. 10 (June 1, 1947).) In 1963, the operative language was amended almost to its current form (IWC wage order No. 5-63, subd. 11(a) (Aug. 30, 1963)), save for the requirement that on duty meals be agreed to in writing, which was added in 1976 (IWC wage order No. 5-76, subd. 11(A) (Oct. 18, 1976)).[14]
As the IWC explained plainly in 1979: "A `duty free' meal period is necessary for the welfare of employees. The section is sufficiently flexible to allow for situations where that is not possible," i.e., by establishing conditions for an on duty meal period. "The Commission received no compelling evidence and concluded that there was no rationale to warrant any change in this section, the basic provisions of which date back more than 30 years." (IWC, Statement as to the Basis for Wage Order No. 5-80 (Sept. 7, 1979); accord, IWC, Statement as to the Basis for Wage Order No. 5-89 (Sept. 7, 1989); IWC statement of findings in support of 1976 wage order revisions (Aug. 13, 1976) p. 14.)
(26) The DLSE's contemporaneous opinion letters reflect the same understanding. In 1988, the DLSE noted it "has historically taken the position that unless employees are relieved of all duties and are free to leave the premises, the meal period is considered as `hours worked.'" (Dept. Industrial Relations, DLSE Opn. Letter No. 1988.01.05 (Jan. 5, 1988) p. 1.) Three years later, in response to a question concerning employees working in the field free of direct supervision and control, it advised that if "the employee has a reasonable opportunity to take the full thirty-minute period free of any duty, the employer has satisfied his or her obligation. The worker must be free to attend to any personal business he or she may choose during the unpaid meal period." (Dept. Industrial Relations, DLSE Opn. Letter No. 1991.06.03 (June 3, 1991) p. 1.)[15] As these opinion letters make clear, and as the DLSE argues in its amicus curiae brief, the wage order's meal period requirement is satisfied if the employee (1) has at least 30 minutes uninterrupted, (2) is free to leave the premises, and (3) is relieved of all duty for the entire period. (DLSE Opn. Letter No. 1988.01.05, supra, at p. 1; Dept. Industrial Relations, DLSE Opn. Letter No. 1996.07.12 (July 12, 1996) p. 1.) We agree with this DLSE interpretation of the wage order.
(27) It was against this background that in 1999 the Legislature first regulated meal periods, previously the exclusive province of the IWC. New section 512 made meal periods a statutory as well as a wage order obligation: an employer must "provid[e] the employee with a meal period of not less than 30 minutes" for workdays lasting more than five hours, and provide two meal periods for workdays in excess of 10 hours, subject to waiver in certain circumstances. (Former § 512, enacted by Stats. 1999, ch. 134, § 6, p. 1823.)[16]
(28) The duty to provide meal periods is not further defined by section 512, but the nature of the duty is evident from surrounding indicia of legislative intent. As discussed, when the Legislature entered the field of meal break regulation in 1999, it entered an area where the IWC and DLSE had, over more than half a century, developed a settled sense of employers' meal break obligations. In such circumstances, we begin with the assumption the Legislature did not intend to upset existing rules, absent a clear expression of contrary intent. (Industrial Welfare Com. v. Superior Court, supra, 27 Cal.3d at p. 734; see also Cal. Drive-in Restaurant Assn. v. Clark, supra, 22 Cal.2d at p. 292 [statutes should be construed insofar as possible to avoid implied repeal of wage orders].) Section 512's mandate that employers "provid[e]" 30-minute meal breaks can be read as shorthand for the requirement contemplated in subdivision 11 of most of the IWC's wage orders: Employers must afford employees uninterrupted half-hour periods in which they are relieved of any duty or employer control and are free to come and go as they please.
Examination of the relevant legislative history confirms this reading. The origins of section 512 trace to the late 1990's, when the IWC amended five wage orders to abolish daily overtime, limiting overtime compensation to hours worked in excess of 40 per week, rather than hours worked in excess of eight per day, as had previously been the case. (See Johnson v. Arvin-Edison Water Storage Dist. (2009) 174 Cal. App. 4th 729, 735 [95 Cal. Rptr. 3d 53].) Troubled by this weakening of employee protections, the Legislature enacted the Eight-Hour-Day Restoration and Workplace Flexibility Act of 1999 (Stats. 1999, ch. 134, p. 1820, enacting Assem. Bill No. 60 (1999-2000 Reg. Sess.)), which restored daily overtime, nullified IWC-approved alternative workweek schedules, and directed the IWC to readopt conforming wage orders. (Sen. Rules Com., Off. of Sen. Floor Analyses, 3d reading analysis of Assem. Bill No. 60 (1999-2000 Reg. Sess.) as amended July 1, 1999, pp. 2-5; see also Stats. 1999, ch. 134, § 2, p. 1820; Assem. Conc. Sen. Amends. to Assem. Bill No. 60 (1999-2000 Reg. Sess.) as amended July 1, 1999, p. 6.)
(29) As part of its response to the IWC's rollback of employee protections, the Legislature wrote into statute various guarantees that previously had been left to the IWC, including meal break guarantees. (§ 512, subd. (a).) The declared intent in enacting section 512 was not to revise existing meal period rules but to codify them in part. (See, e.g., Assem. Com. on Appropriations, Analysis of Assem. Bill No. 60 (1999-2000 Reg. Sess.) as amended Mar. 22, 1999, p. 3; Legis. Counsel's Dig., Assem. Bill No. 60 (1999-2000 Reg. Sess.) 5 Stats. 1999, Summary Dig., p. 62.) It follows that the duty the Legislature intended to impose was the duty as it had existed under the IWC's wage orders. Thus, under what is now section 512, subdivision (a), as under Wage Order No. 5, an employer's obligation when providing a meal period is to relieve its employee of all duty for an uninterrupted 30-minute period.
Hohnbaum contends that an employer has one additional obligation: to ensure that employees do no work during meal periods. He places principal reliance on a series of DLSE opinion letters. In 2001, in the course of discussing rest breaks, the DLSE distinguished an employer's meal break duties and observed that for meal breaks "[an] employer has an affirmative obligation to ensure that workers are actually relieved of all duty, not performing any work, and free to leave the worksite. . . ." (Dept. of Industrial Relations, DLSE Opn. Letter No. 2001.09.17, supra, p. 4, italics added.) In 2002, the DLSE reiterated the point: with regard to meal periods, "an employer has an affirmative obligation to ensure that workers are actually relieved of all duty, not performing any work, and . . . free to leave the employer's premises." (Dept. of Industrial Relations, DLSE Opn. Letter No. 2002.01.28 (Jan. 28, 2002) p. 1, italics added; see also Dept. of Industrial Relations, DLSE Opn. Letter No. 2002.09.04 (Sept. 4, 2002) p. 2 ["[A]s a general rule the required meal period must be an off-duty meal period, during which time the employee . . . is not suffered or permitted to work. . . ."].)
We are not persuaded. The difficulty with the view that an employer must ensure no work is donei.e., prohibit workis that it lacks any textual basis in the wage order or statute. While at one time the IWC's wage orders contained language clearly imposing on employers a duty to prevent their employees from working during meal periods,[17] we have found no order in the last half-century continuing that obligation. Indeed, the obligation to ensure employees do no work may in some instances be inconsistent with the fundamental employer obligations associated with a meal break: to relieve the employee of all duty and relinquish any employer control over the employee and how he or she spends the time. (See Morillion v. Royal Packing Co., supra, 22 Cal.4th at pp. 584-585 [explaining that voluntary work may occur while not subject to an employer's control, and its cessation may require the reassertion of employer control].)
For support, Hohnbaum focuses on the phrase "No employer shall employ any person [without the specified meal period] . . ." (Wage Order No. 5, subd. (11)(A)), contending that "employ" includes permitting or suffering one to work, and so the employer is forbidden from permitting an employee to work during a meal break. Although Hohnbaum is entirely correct about the broad meaning the wage order gives the term "employ" (see Wage Order No. 5, subd. 2(E) ["`Employ' means to engage, suffer, or permit to work.'"]),[18] his argument misconstrues the role that broad definition plays in the structure of subdivision 11(A). The provision identifies both an employer obligation (relieving employees of all duty for 30 minutes) and a condition precedent or trigger for that obligation. "No employer shall employ" is part of the definition of the trigger, not of the obligation. If an employer engages, suffers, or permits anyone to work for a full five hours, its meal break obligation is triggered. "Employ" relates to what must transpire during the five-hour work period; it does not relate to what must transpire next.
(30) What must transpire after the meal break obligation is triggered is covered by later parts of the subdivision relating to waiver, on duty meal periods (and by negative implication off-duty meal periods), and premium pay. When someone is suffered or permitted to worki.e., employedfor five hours, an employer is put to a choice: it must (1) afford an off-duty meal period; (2) consent to a mutually agreed-upon waiver if one hour or less will end the shift; or (3) obtain written agreement to an on duty meal period if circumstances permit. Failure to do one of these will render the employer liable for premium pay. (§ 226.7, subd. (b); Wage Order No. 5, subd. 11(A), (B).) As earlier discussed, because the defining characteristic of on duty meal periods is failing to relieve an employee of duty, not simply "suffering or permitting" work to continue, it follows that off-duty meal periods are similarly defined by actually relieving an employee of all duty: doing so transforms what follows into an off-duty meal period, whether or not work continues.[19]
(31) Proof an employer had knowledge of employees working through meal periods will not alone subject the employer to liability for premium pay; employees cannot manipulate the flexibility granted them by employers to use their breaks as they see fit to generate such liability. On the other hand, an employer may not undermine a formal policy of providing meal breaks by pressuring employees to perform their duties in ways that omit breaks. (Cicairos v. Summit Logistics, Inc. (2005) 133 Cal. App. 4th 949, 962-963 [35 Cal. Rptr. 3d 243]; see also Jaimez v. Daiohs USA, Inc., supra, 181 Cal.App.4th at pp. 1304-1305 [proof of common scheduling policy that made taking breaks extremely difficult would show violation]; Dilts v. Penske Logistics, LLC (S.D.Cal. 2010) 267 F.R.D. 625, 638 [indicating informal anti-meal-break policy "enforced through `ridicule' or `reprimand'" would be illegal].) The wage orders and governing statute do not countenance an employer's exerting coercion against the taking of, creating incentives to forego, or otherwise encouraging the skipping of legally protected breaks.
(32) To summarize: An employer's duty with respect to meal breaks under both section 512, subdivision (a) and Wage Order No. 5 is an obligation to provide a meal period to its employees. The employer satisfies this obligation 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. What will suffice may vary from industry to industry, and we cannot in the context of this class certification proceeding delineate the full range of approaches that in each instance might be sufficient to satisfy the law.
On the other hand, the employer is not obligated to police meal breaks and ensure no work thereafter is performed. Bona fide relief from duty and the relinquishing of control satisfies the employer's obligations, and work 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 under Wage Order No. 5, subdivision 11(B) and Labor Code section 226.7, subdivision (b).
2. Meal period timing
(33) We turn to the question of timing. To determine whether the IWC or the Legislature intended to regulate meal period timing, we consider the language and history of both Labor Code section 512 and Wage Order No. 5. We conclude that, absent waiver, section 512 requires a first meal period no later than the end of an employee's fifth hour of work, and a second meal period no later than the end of an employee's 10th hour of work. We conclude further that, contrary to Hohnbaum's argument, Wage Order No. 5 does not impose additional timing requirements.
We begin with the text of section 512, subdivision (a). On the subject of first meal periods, it provides: "An employer may not employ an employee for a work period of more than five hours per day without providing the employee with a meal period of not less than 30 minutes, except that if the total work period per day of the employee is no more than six hours, the meal period may be waived by mutual consent of both the employer and employee." This provision could be interpreted as requiring employers either to provide a meal break after no more than five hours of work in a day, absent waiver, or simply to provide a meal break at any point in scheduled shifts that exceed five hours.
(34) The first interpretation is the correct one: the statute requires a first meal period no later than the start of an employee's sixth hour of work. Section 512, subdivision (b) resolves the ambiguity. It provides: "Notwithstanding subdivision (a), the Industrial Welfare Commission may adopt a working condition order permitting a meal period to commence after six hours of work if the commission determines that the order is consistent with the health and welfare of the affected employees." The provision employs the language of timing: the IWC may adopt a rule "permitting a meal period to commence after six hours," i.e., as late as six hours into a shift. (Ibid., italics added.) By beginning with "Notwithstanding subdivision (a)," the provision further indicates that any such timing rule would otherwise contravene subdivision (a). Only if subdivision (a) was intended to ensure that a first meal period would commence sooner than six hours, after no more than five hours of work, would this be true. (See Assem. Republican Caucus, analysis of Sen. Bill No. 88 (1999-2000 Reg. Sess.) as amended Aug. 10, 2000, p. 1 [prior to the addition of § 512, subd. (b), noting that "[e]xisting law requires that the meal period begin no later than 5 hours after work begins"].) Accordingly, first meal periods must start after no more than five hours.[20]
We turn to the matter of second meal periods. Section 512, subdivision (a) provides in its second sentence: "An employer may not employ an employee for a work period of more than 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." As with the first sentence of subdivision (a), this language is susceptible of two readings: it could be interpreted as requiring employers to provide a second meal break after no more than 10 hours of work in a day, absent waiver, or as simply requiring employers to provide at least two separate breaks at any point in scheduled shifts that exceed 10 hours. Significantly, however, the language is parallel to subdivision (a)'s first sentence. Hence, if the first sentence was intended to ensure a first meal period no more than five hours into a shift, as subdivision (b) reveals it was, it follows that the second, parallel, sentence should be read to require a second meal period after no more than 10 hours of work in a day, i.e., no later than what would be the start of the 11th hour of work, absent waiver.
(35) Hohnbaum contends section 512 should be read as requiring as well a second meal period no later than five hours after the end of a first meal period if a shift is to continue. The text does not permit such a reading. It requires a second meal after no more than 10 hours of work; it does not add the caveat "or less, if the first meal period occurs earlier than the end of five hours of work." Because the statutory text is conclusive, we need not consider extrinsic sources on this point. (Beal Bank, SSB v. Arter & Hadden, LLP (2007) 42 Cal. 4th 503, 507-508 [66 Cal. Rptr. 3d 52, 167 P.3d 666].)
The further issue is whether Wage Order No. 5 imposes any additional requirement. We agree with Brinker that it does not.
(36) The IWC has long been understood to have the power to adopt requirements beyond those codified in statute. (Industrial Welfare Com. v. Superior Court, supra, 27 Cal.3d at p. 733; Cal. Drive-in Restaurant Assn. v. Clark, supra, 22 Cal.2d at pp. 292-294; see also ante, at p. 1027.) Section 516 creates an exception; it bars the use of this power to diminish section 512's protections: "Except as provided in Section 512, the Industrial Welfare Commission may adopt or amend working condition orders with respect to break periods, meal periods, and days of rest for any workers in California consistent with the health and welfare of those workers." (Italics added). While the Legislature in section 516 generally preserved the IWC's authority to regulate break periods, it intended to prohibit the IWC from amending its wage orders in ways that "conflict[] with [the] 30-minute meal period requirements" in section 512. (Legis. Counsel's Dig., Sen. Bill No. 88 (1999-2000 Reg. Sess.) 6 Stats. 2000, Summary Dig., p. 212; see Bearden v. U.S. Borax, Inc. (2006) 138 Cal. App. 4th 429, 438 [41 Cal. Rptr. 3d 482].) In the absence of a conflict, however, the IWC may still augment the statutory framework with additional protections on matters not covered by section 512; that is, the Legislature did not intend to occupy the field of meal period regulation. (See, e.g., Sen. 3d reading analysis of Sen. Bill No. 88 (1999-2000 Reg. Sess.) as amended Aug. 10, 2000, p. 5 [authorizing the IWC to regulate so long as the orders it adopts are "consistent" with § 512]; § 226.7 [imposing premium wages for violations of the IWC's meal period provisions, rather than § 512].)
The text of Wage Order No. 5 is ambiguous. Subdivision 11(A) provides in relevant part: "No employer shall employ any person for a work period of more than five (5) hours without a meal period of not less than 30 minutes, except that when a work period of not more than six (6) hours will complete the day's work the meal period may be waived by mutual consent of the employer and employee." This language may be read to mirror our interpretation of section 512: employees are due a first meal period after no more than five hours of work, a second meal period after no more than 10 hours, and so on. Alternatively, it may be read more restrictively, as allowing an employer to schedule no more than five hours of work between a first meal period and either another meal period or the end of the shift. Thus, for example, an employee given a meal period after three hours of work would become entitled after eight hours of work either to end the shift or to take a second meal period, even though 10 hours of work were not yet complete.[21] In the face of this textual ambiguity, we consider the relevant adoption history. (See Manriquez v. Gourley (2003) 105 Cal. App. 4th 1227, 1235 [130 Cal. Rptr. 2d 209].)
Evidence in the historical record suggests the IWC's meal period language originally was intended to limit employees to five-hour work intervals without a meal. In 1943, the first version of the current language appeared: "No employer shall employ any woman or minor for a work period of more than five (5) hours without an allowance of not less than thirty (30) minutes for a meal." (IWC wage order No. 5 NS, subd. 3(d) (June 28, 1943).) The provision's intended function was to ensure workers were not required to go too long without a meal break; the IWC found "that it is necessary to insure a meal period after not more than 5 hours of work in order to protect the health of women and minors." (IWC meeting mins. (Feb. 5, 1943) p. 19; accord, IWC meeting mins. (Apr. 14, 1943) p. 6.)[22]
At the time, this provision was understood to apply to the work intervals that conclude shifts, as well as those that begin shifts. In response to a request from a regulated store that, for shifts running from 9:00 a.m. to 6:00 p.m., employees be permitted to lunch between 11:00 a.m. and noon, i.e., with six hours between the end of the meal period and the shift end, the IWC adopted an exception to the five-hour limit, allowing work periods of up to six hours at the end of shifts. (IWC wage order No. 5 NS, subd. 3(d) (June 28, 1943) ["However, if the employee's work for the day will be completed within six (6) hours, such meal period need not be given."]; IWC meeting mins. (Jan. 29, 1943) p. 15; IWC meeting mins. (Feb. 5, 1943) p. 19.)
In 1947, the IWC briefly departed from its original formulation, rewriting the timing requirement to apply only to the beginning of each work shift. (IWC wage order No. 5 R, subd. 10 (June 1, 1947) ["No employee shall be required to work more than five (5) consecutive hours after reporting for work, without a meal period of not less than (30) minutes."].) In 1952, however, it returned to its previous approach, adopting language that has been carried forward to today without significant change.[23] (IWC wage order No. 5-52, subd. 11 (Aug. 1, 1952) ["No employer shall employ any woman or minor for a work period of more than five (5) hours without a meal period of not less than thirty (30) minutes; except that when a work period of not more than six (6) hours will complete the day's work, the meal period may be waived."].) The IWC explained this revision was intended to expand the right to meal periods from a single break in the first five hours to one at least every five hours through the day: "`The meal period provision was amended to permit a 6-hour work period without a meal when such a work shift would complete the day's work, [with] the additional provision that a meal period shall be every 5 hours rather than providing only one meal period within the first 5 hours.'" (IWC meeting mins. (May 16, 1952) p. 33 [adopting summary of findings], italics added.)
The IWC's descriptions of its meal period requirement in the ensuing years similarly reflected an understanding that work periods before and after meals were to be limited to five hours absent waiver. For example, the commission, discussing IWC wage order No. 12-63 (Aug. 30, 1963) (identically worded to Wage Order No. 5 save for a longer permissible period between meals), explained that the meal provision "requires the employer to provide meal periods at intervals of no more than five and one-half hours within the work period." (Wage Board for IWC Wage Order No. 12Motion Picture Industry, Rep. & Recommendations (Oct. 21, 1966) p. 6; see also Margaret T. Miller, IWC executive officer, letter to Klaus Wehrenberg (July 13, 1982) p. 2 [under the IWC's wage orders, "meal periods must be provided `at such intervals as will result in no employee working longer than five consecutive hours without an eating period'"].)
In 1999, however, the Legislature passed Assembly Bill No. 60 (1999-2000 Reg. Sess.), which among other things repudiated the IWC's actions in adopting a series of wage orders that had eliminated daily overtime. (Harris v. Superior Court (2011) 53 Cal. 4th 170, 177 [135 Cal. Rptr. 3d 247, 266 P.3d 953]; ante, at p. 1037.) Assembly Bill No. 60 repealed five wage orders, including IWC wage order No. 5-98 (Jan. 1, 1998), and required the IWC to review its wage orders and readopt orders conforming to the Legislature's expressed intentions. (§ 517; Stats. 1999, ch. 134, § 21, p. 1829.) It also enacted section 512, which for the first time set out statutory meal period requirements.
The IWC complied with the directive to adopt new wage orders. Pending completion of plenary review, it issued an interim wage order applicable to all industries, including those previously and subsequently covered by Wage Order No. 5. Notably, the interim order mirrored section 512's language, spelling out that a second meal period was required after 10 hours of work, rather than leaving the timing of second meal periods to implication, as previous wage orders generally had. (IWC interim wage order2000 (Mar. 1, 2000) subd. 9.)[24] The IWC also explained its intention that, absent waiver, employees were entitled to "a thirty-minute meal period for every 5 hours of work" (IWC official notice, Summary of Interim Wage Order2000, italics added), a lesser requirement than the IWC's prior view that "`a meal period shall be every 5 hours'" (IWC meeting mins. (May 16, 1952) p. 33). From the text of the interim order and the official explanation, it is apparent the IWC intended a requirement parallel to that of the Legislature's section 512, with a second meal period due after 10 hours, rather than after an interval of no more than five hours following a first meal period.
Thereafter, the IWC held public hearings and adopted revised wage orders for each industry, including the current version of Wage Order No. 5, wage order No. 5-2001. From our review of the text of the various wage orders, the IWC's official explanations of its intent behind these orders, and the transcripts of the IWC's numerous hearings, we conclude the IWC abandoned any requirement that work intervals be limited to five hours following the first meal break.
With only limited exceptions, the IWC intended its 2001 wage orders to embrace section 512's meal period requirements, not impose different ones. Having borrowed the provisions of Assembly Bill No. 60 (1999-2000 Reg. Sess.), including section 512, for its interim wage order, the IWC simply copied the interim wage order's meal provision into most of its industry-specific wage orders. (IWC public hearing transcript (June 30, 2000) pp. 7-10 [explaining intent to mirror Assem. Bill No. 60 on meals]; see, e.g., IWC wage order No. 2-2001 (Jan. 1, 2001); IWC wage order No. 3-2001 (Jan. 1, 2001); IWC wage order No. 6-2001 (Jan. 1, 2001); Cal. Code Regs., tit. 8, §§ 11020, subd. 11(A), (B), 11030, subd. 11(A), (B), 11060, subd. 11(A), (B).) The IWC explained that under these wage orders, first meals would continue to be assured for employees "working for a period of more than five (5) hours," while second meal periods would now be provided "in accordance with Labor Code § 512(a)." (IWC, Statement as to the Basis (Jan. 1, 2001) p. 19; see also IWC summary of amends. to wage orders Nos. 1-13, 15 & 17 (Jan. 1, 2001) [except as specified in wage orders Nos. 4, 5 & 12, employees are entitled to "a 30-minute meal period for every 5 hours of work"].) Thus, as to the majority of its 2001 wage orders, the IWC did not intend to impose a different meal period requirement than that spelled out in section 512; specifically, it did not intend to require employers to provide employees a second meal period no more than five hours after a first meal period. These orders and the statute are congruent; under each, a first meal period is guaranteed after five hours of work, while a second meal period is required only after 10 hours of work.
The IWC varied slightly the language of wage orders Nos. 4-2001 and 5-2001. These two orders retained the same subdivision 11(A) language requiring a meal period for every five hours, as in other wage orders, but they omitted the subdivision 11(B) language used elsewhere to define the conditions for receiving, and for waiving, a second meal period. As we shall explain, this omission was for reasons related to meal period waivers, not meal timing. The IWC did not intend in Wage Order No. 5 to depart from the timing requirements contained in other wage orders or section 512.
The IWC had originally modified the meal waiver requirements in wage orders Nos. 4 and 5 in 1993, in response to a health care industry petition to permit its employees to waive a second meal period on longer shifts in order to leave earlier. (See IWC petn. 93-1 (Jan. 25, 1993) pp. 31-32; IWC wage order No. 4-89, subd. 11(C) (as amended Aug. 21, 1993); IWC wage order No. 5-89, subd. 11(C) (as amended Aug. 21, 1993); IWC, Statement as to the Basis of amends. to §§ 2, 3 & 11 of IWC wage order No. 5-89 (June 29, 1993).) The IWC later extended similar waiver rights to all employees covered by these wage orders and three others, but that extension was among many wage order changes repealed by the Legislature in 1999. (IWC, Statement as to the Basis, overtime and related issues (Apr. 11, 1997) pp. 7-8; Stats. 1999, ch. 134, § 21, p. 1829.)
Thereafter, health care representatives persuaded the IWC to at least preserve expanded waiver rights for their industry, along the lines of those originally afforded in 1993. (See IWC, Statement as to the Basis (Jan. 1, 2001) pp. 19-20.) Accordingly, wage orders No. 4-2001 and No. 5-2001 each contain a provision absent from other wage orders, permitting health care employees to waive one of two meal periods on longer shifts. (IWC wage order No. 4-2001 (Jan. 1, 2001) (Cal. Code Regs., tit. 8, § 11040, subd. 11(D)); Wage Order No. 5, subd. 11(D).)[25] Notably, the waiver provisions permit meal waivers even on shifts in excess of 12 hours and thus conflict with language in the standard subdivision regulating second meal periods in other wage orders that limits second meal waivers to shifts of 12 hours or less (see, e.g., IWC wage order No. 2-2001 (Jan. 1, 2001) (Cal. Code Regs., tit. 8, § 11020, subd. 11(B))). For this reason, the IWC elected to omit that standard subdivision from these two wage orders. (See IWC, Statement as to the Basis (Jan. 1, 2001) pp. 19-20.) Because the omission related to waiver and was not the product of any intent to include different meal timing requirements in Wage Order No. 5, we interpret that order as imposing the same timing requirements as those in most of the IWC's other wage orders and in section 512.[26]
Hohnbaum contends he does not seek to require earlier second meal periods than provided for by section 512 (and, as we have determined, by Wage Order No. 5); rather, he seeks only to interpret Wage Order No. 5, subdivision 11(A) as requiring that first meal periods be timed to prevent work periods, before or after, exceeding five hours. While we agree that the period before a first meal is limited to five hours (see § 512, subd. (a)), we cannot agree that the current version of Wage Order No. 5 limits to five hours the amount of work after a meal.
(37) First, such a reading of subdivision 11(A) in the IWC's current wage orders would render the subdivision 11(B) guarantee of a second meal period after 10 hours of work, included in most of those same orders, superfluous. (See, e.g., IWC wage order No. 2-2001 (Jan. 1, 2001) (Cal. Code Regs., tit. 8, § 11020, subd. 11(A), (B)).) We avoid such constructions whenever possible. (Department of Alcoholic Beverage Control v. Alcoholic Beverage Control Appeals Bd. (2006) 40 Cal. 4th 1, 14 [50 Cal. Rptr. 3d 585, 145 P.3d 462].)[27]
(38) Second, Hohnbaum's argument rests on the contention that as used by the IWC, "`work period' is a term of art meaning `a continuing period of hours worked,'" and thus the five-hour "work period" limit in subdivision 11(A) of the wage orders must preclude more than five hours of continuous work after a meal period. "Work period" is not defined in any wage order. If the IWC's wage orders once informally adhered to Hohnbaum's usage, its 2001 orders no longer do. Subdivision 11(B) in most of the current orders refers to a "work period of more than ten (10) hours per day" before a second meal period. (E.g., IWC wage order No. 1-2001 (Jan. 1, 2001) (Cal. Code Regs., tit. 8, § 11010, subd. 11(B)).) Any such work period must have been broken by a first meal period and thus is not "`a continuing period of hours worked.'"
Third, there is no evidence the IWC intended to supplement the requirements of section 512 in the fashion Hohnbaum suggests. The implication is to the contrary. Having received a legislative rebuke, the IWC sought to make its orders track Assembly Bill No. 60 (1999-2000 Reg. Sess.) as closely as possible and expressed hesitance about departing from statutory requirements. (See, e.g., IWC public hearing transcript (May 5, 2000) pp. 52-56.) What departures it made appear to have been conscious choices, expressly identified in the IWC's statement as to the basis, and frequently justified by explicit reliance on its authority to augment the Labor Code. (See IWC, Statement as to the Basis (Jan. 1, 2001) pp. 19-20.) In contrast, the prospect of preserving any meal timing requirement previously implicit in Wage Order No. 5, beyond the requirements of section 512, was never discussed in the agency's 2000 hearings nor in its publications describing and explaining its 2001 wage orders. In the absence of any such discussion, we conclude the IWC did not intend to preserve Hohnbaum's posited requirement.[28]
(39) Accordingly, we conclude that Wage Order No. 5 imposes no meal timing requirements beyond those in section 512. Under the wage order, as under the statute, an employer's obligation is to provide a first meal period after no more than five hours of work and a second meal period after no more than 10 hours of work.
B. Certification of a Meal Period Subclass
We return to the question of certification. The proposed meal period subclass includes all "Class Members who worked one or more work periods in excess of five (5) consecutive hours, without receiving a thirty (30) minute meal period during which the Class Member was relieved of all duties, from and after October 1, 2000." The trial court accepted the subclass without modification and concluded: "Although a determination that defendant need not force employees to take breaks may require some individualized discovery, the common alleged issues of meal and rest violations predominate." Thus, it reasoned that even if Brinker were correct about the nature of its duties, to treat the case as a class action would still be the better course.
One aspect of the class definition is notable: It sweeps in not only every Brinker employee who might have a claim under Hohnbaum's failure to provide meal periods theory, but also every employee who might have had a claim under the theory that a meal period must be provided every five hours. Consequently, because we have concluded neither Wage Order No. 5 nor section 512 imposes such a timing requirement, the class definition as presently drawn includes individuals with no possible claim.
(40) That aspect of the class definition is notable for a second reason. In an unusual action requested by the parties, the trial court before deciding certification issued an explicit ruling on Hohnbaum's meal timing theory, agreeing with Hohnbaum that section 512 required a meal period every five hours. That the meal subclass definition thereafter incorporated Hohnbaum's timing theory thus raises the specter that the certification may have been influenced, in part, by the trial court's legal assumption about the theory's merits. Any such assumption would have been incorrect, given our ruling on the actual requirements of Wage Order No. 5 and section 512. (See ante, at pp. 1041-1049.) A grant or denial of class certification that rests in part on an erroneous legal assumption is error; without regard to whether such a certification might on other grounds be proper, it cannot stand. (Linder v. Thrifty Oil Co., supra, 23 Cal.4th at p. 436 ["[A]n order based upon improper criteria or incorrect assumptions calls for reversal `"even though there may be substantial evidence to support the court's order."'"].)
Under the unique circumstances of this case, however, we need not decide whether or not the trial court erred. Our subsequent ruling on Hohnbaum's meal timing theory, solicited by the parties, has changed the legal landscape; whether the trial court may have soundly exercised its discretion before that ruling is no longer relevant. At a minimum, our ruling has rendered the class definition adopted by the trial court overinclusive: The definition on its face embraces individuals who now have no claim against Brinker. In light of our substantive rulings, we consider it the prudent course to remand the question of meal subclass certification to the trial court for reconsideration in light of the clarification of the law we have provided.
VI. Off-the-clock Claims Class Certification
The third disputed subclass covers "Class Members who worked `off-the-clock' or without pay from and after August 16, 2000." As with the rest period subclass, we consider only whether substantial evidence supports the trial court's conclusion that common questions predominate. None does.
Hohnbaum's off-the-clock claims are an offshoot of his meal period claims. He contends Brinker required employees to perform work while clocked out during their meal periods; they were neither relieved of all duty nor afforded an uninterrupted 30 minutes, and were not compensated. Hohnbaum further contends Brinker altered meal break records to conceal time worked during these periods.
Unlike for the rest period claim and subclass, for this claim neither a common policy nor a common method of proof is apparent. The rest period claim involved a uniform Brinker policy allegedly in conflict with the legal requirements of the Labor Code and the governing wage order. The only formal Brinker off-the-clock policy submitted disavows such work, consistent with state law.[29] Nor has Hohnbaum presented substantial evidence of a systematic company policy to pressure or require employees to work off-the-clock, a distinction that differentiates this case from those he relies upon in which off-the-clock classes have been certified. (See, e.g., Salvas v. Wal-Mart Stores, Inc. (2008) 452 Mass. 337 [893 N.E.2d 1187, 1210-1211]; Hale v. Wal-Mart Stores, Inc. (Mo.Ct.App. 2007) 231 S.W.3d 215, 220, 225-228; Iliadis v. Wal-Mart Stores, Inc. (2007) 191 N.J. 88 [922 A.2d 710, 715-716, 723-724].)
Moreover, that employees are clocked out creates a presumption they are doing no work, a presumption Hohnbaum and the putative class members have the burden to rebut. As all parties agree, liability is contingent on proof Brinker knew or should have known off-the-clock work was occurring. (Morillion v. Royal Packing Co., supra, 22 Cal.4th at p. 585; see, e.g., White v. Starbucks Corp. (N.D.Cal. 2007) 497 F. Supp. 2d 1080, 1083-1085 [granting the defense summary judgment on an off-the-clock claim in the absence of proof the employer knew or should have known of the employee's work].) Nothing before the trial court demonstrated how this could be shown through common proof, in the absence of evidence of a uniform policy or practice. Instead, the trial court was presented with anecdotal evidence of a handful of individual instances in which employees worked off-the-clock, with or without knowledge or awareness by Brinker supervisors. On a record such as this, where no substantial evidence points to a uniform, companywide policy, proof of off-the-clock liability would have had to continue in an employee-by-employee fashion, demonstrating who worked off-the-clock, how long they worked, and whether Brinker knew or should have known of their work. Accordingly, the Court of Appeal properly vacated certification of this subclass.
DISPOSITION
For the foregoing reasons, we affirm the Court of Appeal's judgment as to the off-the-clock subclass. We reverse its judgment as to the rest period subclass. Finally, as to the meal period subclass, we reverse the Court of Appeal's judgment insofar as it directed the trial court to enter denial of certification with prejudice. We remand to the Court of Appeal with directions to, in turn, remand to the trial court for it to reconsider meal period subclass certification in light of the clarification of the law we have provided.
Cantil-Sakauye, C. J., Kennard, J., Baxter, J., Chin, J., Corrigan, J., and Liu, J., concurred.
WERDEGAR, J., Concurring.
I join fully in today's majority opinion, which I authored. For guidance on the issue we remand, meal period subclass certification, I write separately to emphasize what our opinion does not say. In returning the case for reconsideration, the opinion of the court does not endorse Brinker's argument, accepted by the Court of Appeal, that the question why a meal period was missed renders meal period claims categorically uncertifiable. Nor could it, for such a per se bar would be inconsistent with the law governing reporting obligations and our historic endorsement of a variety of methods that render collective actions judicially manageable.
Employers covered by Industrial Welfare Commission (IWC) wage order No. 5-2001 (Cal. Code Regs., tit. 8, § 11050) have an obligation both to relieve their employees for at least one meal period for shifts over five hours (id., subd. 11(A)) and to record having done so (id., subd. 7(A)(3) ["Meal periods . . . shall also be recorded."]). If an employer's records show no meal period for a given shift over five hours, a rebuttable presumption arises that the employee was not relieved of duty and no meal period was provided. This is consistent with the policy underlying the meal period recording requirement, which was inserted in the IWC's various wage orders to permit enforcement. (See, e.g., IWC board for wage order No. 7-63 meeting mins. (Dec. 14-15, 1966) pp. 4-5 [rejecting proposal to eliminate the meal period recording requirement because "without the recording of all in-and-out time, including meal periods, the enforcement staff would be unable to adequately investigate and enforce" a wage order's meal period provisions].) An employer's assertion that it did relieve the employee of duty, but the employee waived the opportunity to have a work-free break, is not an element that a plaintiff must disprove as part of the plaintiff's case-in-chief. Rather, as the Court of Appeal properly recognized, the assertion is an affirmative defense, and thus the burden is on the employer, as the party asserting waiver, to plead and prove it. (See, e.g., Waller v. Truck Ins. Exchange, Inc. (1995) 11 Cal. 4th 1, 31, 33 [44 Cal. Rptr. 2d 370, 900 P.2d 619]; Williams v. Marshall (1951) 37 Cal. 2d 445, 456 [235 P.2d 372].)[1]
While individual issues arising from an affirmative defense can in some cases support denial of certification,[2] they pose no per se bar (see, e.g., Sav-On Drug Stores, Inc. v. Superior Court (2004) 34 Cal. 4th 319, 334-338 [17 Cal. Rptr. 3d 906, 96 P.3d 194]; Weinstat v. Dentsply Internat., Inc. (2010) 180 Cal.App.4th 1213, 1235 [103 Cal. Rptr. 3d 614]). Instead, whether in a given case affirmative defenses should lead a court to approve or reject certification will hinge on the manageability of any individual issues. (See Sav-On, at p. 334.)
For purposes of class action manageability, a defense that hinges liability vel non on consideration of numerous intricately detailed factual questions, as is sometimes the case in misclassification suits,[3] is different from a defense that raises only one or a few questions and that operates not to extinguish the defendant's liability but only to diminish the amount of a given plaintiff's recovery. We have long settled that individual damages questions will rarely if ever stand as a bar to certification. (Sav-On Drug Stores, Inc. v. Superior Court, supra, 34 Cal.4th at p. 334; Employment Development Dept. v. Superior Court (1981) 30 Cal. 3d 256, 266 [178 Cal. Rptr. 612, 636 P.2d 575].) "`In almost every class action, factual determinations [of damages] . . . to individual class members must be made. [Citations.] Still we know of no case where this has prevented a court from aiding the class to obtain its just restitution. Indeed, to decertify a class on the issue of damages or restitution may well be effectively to sound the death-knell of the class action device.'" (B.W.I. Custom Kitchen v. Owens-Illinois, Inc. (1987) 191 Cal. App. 3d 1341, 1354 [235 Cal. Rptr. 228].)
Instead, we have encouraged the use of a variety of methods to enable individual claims that might otherwise go unpursued to be vindicated, and to avoid windfalls to defendants that harm many in small amounts rather than a few in large amounts. (See Sav-On Drug Stores, Inc. v. Superior Court, supra, 34 Cal.4th at pp. 339-340; Daar v. Yellow Cab Co. (1967) 67 Cal. 2d 695, 714-715 [63 Cal. Rptr. 724, 433 P.2d 732].) Representative testimony, surveys, and statistical analysis all are available as tools to render manageable determinations of the extent of liability. (See, e.g., Bell v. Farmers Ins. Exchange (2004) 115 Cal. App. 4th 715, 749-755 [9 Cal. Rptr. 3d 544] [upholding as consistent with due process the use of surveys and statistical analysis to measure a defendant's aggregate liability under the IWC's wage orders]; Dilts v. Penske Logistics, LLC (S.D.Cal. 2010) 267 F.R.D. 625, 638 [certifying a meal break subclass because liability could be established through employer records and representative testimony, and class damages could be established through statistical sampling and selective direct evidence]; see generally Sav-On, at p. 333 & fn. 6).) "[S]tatistical inference offers a means of vindicating the policy underlying the Industrial Welfare Commission's wage orders without clogging the courts or deterring small claimants with the cost of litigation." (Bell, at p. 751.)
Given these settled principles, Brinker has not shown the defense it raises, waiver, would render a certified class categorically unmanageable. Instead, it remains for the trial court to decide on remand, in the fullness of its discretion, whether in this case methods exist sufficient to render class treatment manageable. As to that question, neither the full court nor I express any opinion.
Liu, J., concurred.
Arbitration and Discrimination
Arbitration and Discrimination
Diaz v. Sohnen Enters.
SOURCE:
KEY WORDS:
Wage and Hour, Arbitration, Agreement, Continuation, Discrimination
AGENCY:
COURT OF APPEAL OF THE STATE OF CALIFORNIA SECOND APPELLATE DISTRICT DIVISION SEVEN
B283077
Erika DIAZ, Plaintiff and Respondent,
v. SOHNEN ENTERPRISES et al., Defendants and Appellants. | B283077 (Los Angeles CountySuper. Ct. No. BC644622) |
_________________________
FACTUAL AND PROCEDURAL BACKGROUND
Erika Diaz, an employee of Sohnen Enterprises, filed a complaint alleging workplace discrimination on December 22, 2016. Twenty days earlier, on December 2, 2016, she and her co-workers received notice at an in-person meeting that the company was adopting a new dispute resolution policy requiring arbitration of all claims. At that meeting, according to the declaration of Marla Carr, the Chief Operating Officer of Sohnen, Carr informed all employees present, including Diaz, about the new dispute resolution agreement. She included in her explanation that continued employment by an employee who refused to sign the agreement would itself constitute acceptance of the dispute resolution agreement. According to Carr, she provided the explanation in English and Elaina Diaz, a human resources employee, explained the terms in Spanish. Diaz confirmed this in her own declaration, in which she stated that she discussed the terms in Spanish; she did not provide further details about the December 2 meeting. All employees received a copy of the agreement to review at home.
On December 19, 2016, representatives of the company met privately with Diaz, who had indicated to Elaina Diaz on December 14 that she did not wish to sign the agreement. Carr and Diaz advised her again, in Spanish and English, that continuing to work constituted acceptance of the agreement.
On December 23, 2016, Diaz and her lawyer presented to Sohnen a letter dated December 20, 2016 rejecting the agreement but indicating that Diaz intended to continue her employment. On the same date, Diaz also served the complaint in this action.On January 17, 2017, Sohnen sent a demand for arbitration to Diaz’s counsel, based on the fact of Diaz’s continued employment at the company. Counsel for Diaz did not reply. Sohnen filed its motion to compel arbitration in April. Diaz filed opposition in May. The trial court heard argument, and denied the motion.
The trial court, in its oral ruling, held that the agreement was a "take-it or leave-it contract and (sic ) adhesion. There is no meeting of the minds." The court made no factual findings, nor did it address whether the agreement was substantively unconscionable.
DISCUSSION
A. We Review The Ruling De Novo
The facts in the record are undisputed. Accordingly, our review is de novo. ( Rosenthal v. Great Western Fin. Securities Corp. (1996) 14 Cal.4th 394, 413, 58 Cal.Rptr.2d 875, 926 P.2d 1061 ; Flores v. Nature’s BestDistribution, LLC (2016) 7 Cal.App.5th 1, 9, 212 Cal.Rptr.3d 284 ; Esparza v. Sand & Sea, Inc. (2016) 2 Cal.App.5th 781, 787, 206 Cal.Rptr.3d 474.)B. The Record Demonstrates Consent to Arbitration
Respondent Diaz argues that she was off-work, due to illness, between December 17 and December 23, 2016. The record, however, contains no evidence to support that assertion; Diaz filed no declaration in opposition to the motion to compel, nor did any of the declarations filed present facts supporting the argument of counsel. We review based on the factual record before the trial court.
When presented with a petition to compel arbitration, the initial issue before the court is whether an agreement has been formed. ( American Express Co. v. Italian Colors Restaurant (2013) 570 U.S. 228, 233 [133 S.Ct. 2304, 2306, 186 L.Ed.2d 417 ] [arbitration is a matter of contract]; Pinnacle Museum Tower Assn. v. Pinnacle Market Development (US ), LLC (2012) 55 Cal.4th 223, 236, 145 Cal.Rptr.3d 514, 282 P.3d 1217 [" ‘ " ‘a party cannot be required to submit to arbitration any dispute which he has not agreed to so submit’ " ’ "].)
It is the party seeking to compel arbitration which bears the burden of proving the existence of the agreement. ( Rosenthal, supra , 14 Cal.4th at p. 413, 58 Cal.Rptr.2d 875, 926 P.2d 1061.) In this case, Sohnen presented to the trial court evidence of the manner in which the agreement was presented to Diaz, and the actions which followed. This undisputed evidence was sufficient to meet Sohnen’s burden. California law in this area is settled: when an employee continues his or her employment after notification that an agreement to arbitration is a condition of continued employment, that employee has impliedly consented to the arbitration agreement. ( Pinnacle, supra , 55 Cal.4th at 236, 145 Cal.Rptr.3d 514, 282 P.3d 1217 ; Harris v. TAP Worldwide, LLC (2016) 248 Cal.App.4th 373, 383, 203 Cal.Rptr.3d 522 ; Craig v. Brown & Root, Inc. (2000) 84 Cal.App.4th 416, 420, 100 Cal.Rptr.2d 818 ; cf. Asmus v. PacificBell (2000) 23 Cal.4th 1, 11, 96 Cal.Rptr.2d 179, 999 P.2d 71 [continued employment demonstrated implied acceptance of change in job security rules].)
The dissent relies in part on three cases, two of which apply the law of other states, which come to a different conclusion. The first, Scott v. Education Management Corporation (3d Cir. 2016) 662 Fed.Appx. 126 involved an arbitration agreement presented to the employee after a federal civil rights dispute arose. The case was decided under Pennsylvania law which, according to the decision, requires an explicit agreement, not an implied agreement. (Id. at p. 131 ) The decision, by its own terms, does not constitute binding precedent. In the second case, Bayer v. Neiman Marcus Holdings, Inc. (N.D.Cal. Nov. 8, 2011, No. CV 11-3705 MEJ), 2011 WL 5416173, a court in the Northern District of California, acknowledging that under California law an employee could either expressly consent to a new arbitration agreement or be bound by continuing to work after it was presented, found that the terms of the agreement before it required a signature to be effective. Finally, in Kunzie v. Jack-In-The-Box, Inc . (Mo.Ct.App. 2010) 330 S.W.3d 476, 486, the court held that, under Missouri law, the assent of an employee cannot be implied where the employee has continued to work after a change in conditions of employment was presented.
Diaz relies on Mitri v. Arnel Management Co. (2007) 157 Cal.App.4th 1164, 69 Cal.Rptr.3d 223, and Gorlach v. Sports Club Co. (2012) 209 Cal.App.4th 1497, 148 Cal.Rptr.3d 71, arguing that these cases support the trial court’s ruling. Neither case, however, addresses the situation presented here; accordingly, neither supports the result below.
In Mitri, the employee acknowledged receipt of an employee handbook containing an arbitration provision, but the acknowledgement form did not reference or contain any agreement to comply with the arbitration provision. ( Mitri, supra , 157 Cal.App.4th at p. 1173, 69 Cal.Rptr.3d 223.) The general acknowledgment stands in distinction to the express explanation provided twice to Diaz: that continued employment would itself be a manifestation of agreement to the arbitration provisions.
In Gorlach, the handbook provided to employees contained an express signature requirement for the arbitration agreement: "[T]he handbook told employees that they must sign the arbitration agreement, implying that it was not effective until (and unless) they did so. Because Gorlach never signed the arbitration agreement, we cannot imply the existence of such an agreement between the parties." ( Gorlach, supra , 209 Cal.App.4th at p. 1509, 148 Cal.Rptr.3d 71.) Here, there was no such implication because Diaz was told that her continued employment was sufficient. Moreover, unlike Diaz, Gorlach left her employment to avoid the arbitration obligation. ( Gorlach, supra , 209 Cal.App.4th at p. 1508, 148 Cal.Rptr.3d 71.) The uncontradicted evidence in this record demonstrates that Diaz maintained her employment status between December 2 and December 23, and remained an employee at the time of the hearing in this case. As a result, she was already bound by the arbitration agreement before the presentation of the letter indicating both her rejection of the agreement and her intent to remain employed. Although Diaz now asserts that this forced Sohnen to choose whether to proceed without arbitration, this is incorrect. At most, the letter was an attempt to repudiate the agreement. (See, e.g. Taylor v. Johnston (1975) 15 Cal.3d 130, 137, 123 Cal.Rptr. 641, 539 P.2d 425 [express repudiation requires clear and unequivocal refusal to perform]; Mammoth Lakes LandAcquisition, LLC v. Town of Mammoth Lakes (2010) 191 Cal.App.4th 435, 463, 120 Cal.Rptr.3d 797 [same].)
Neither party has briefed the issue of repudiation, and the potential effect of an attempted repudiation on the rights of the parties is not before this court.
In any event, because the employment agreement between Diaz and Sohnen was at-will, Sohnen could unilaterally change the terms of Diaz’s employment agreement, as long as it provided Diaz notice of the change. "[I]t is settled that an employer may unilaterally alter the terms of an employment agreement, provided such alteration does not run afoul of the Labor Code. [Citations.]" ( Schachter v. Citigroup (2009) 47 Cal.4th 610, 619, 101 Cal.Rptr.3d 2, 218 P.3d 262.) "The at-will presumption authorizing an employer to discharge or demote an employee similarly and necessarily authorizes an employer to unilaterally alter the terms of employment, provided that the alteration does not violate a statute or breach an implied or express contractual agreement." ( Id. at p. 620, 101 Cal.Rptr.3d 2, 218 P.3d 262 ; see also DiGiacinto v. Ameriko-Omserv Corp. (1997) 59 Cal.App.4th 629, 636-637, 69 Cal.Rptr.2d 300 [in adopting the majority view of at-will contracts, the court stated "[T]the majority line of cases supports the proposition that as a matter of law, an at-will employee who continues in the employ of the employer after the employer has given notice of changed terms or conditions of employment has accepted the changed terms and conditions. Presumably, under this approach, it would not be legally relevant if the employee also had complained, objected, or expressed disagreement with the new offer; as long as the employee continued in employment with notice of the new terms, the employee has no action for breach of contract as a matter of law."].)
C. Diaz Has Not Demonstrated That The Arbitration Agreement Is Unenforceable
Once the party seeking arbitration has established that a binding agreement was formed, as Sohnen did here, the burden shifts to the party opposing arbitration to demonstrate the agreement cannot be enforced. ( Engalla v. Permanente Medical Group, Inc. (1997) 15 Cal.4th 951, 972, 64 Cal.Rptr.2d 843, 938 P.2d 903 ; Rosenthal, supra , 14 Cal.4th at pp. 409-410, 58 Cal.Rptr.2d 875, 926 P.2d 1061.)
A showing that an agreement is unconscionable can bar enforcement. The doctrine has "both a procedural and a substantive element, the former focusing on oppression or surprise due to unequal bargaining power, the latter on overly harsh or one-sided results." ( Baltazar v. Forever 21, Inc. (2016) 62 Cal.4th 1237, 1243, 200 Cal.Rptr.3d 7, 367 P.3d 6.) Both elements must be present for a court to refuse enforcement. ( Ibid. ; see also Pinnacle, supra , 55 Cal.4th at p. 246, 145 Cal.Rptr.3d 514, 282 P.3d 1217 [both elements must be present, but there is a sliding scale; if more of one element is shown, less of the other need be present].)
The trial court found that the contract was adhesive in nature, but that finding, standing alone, is not sufficient. (See Baltazar, supra , 62 Cal.4th at p. 1245, 200 Cal.Rptr.3d 7, 367 P.3d 6 ["[t]he adhesive nature of the employment contract requires us to be ‘particularly attuned’ to her claim of unconscionability [citation], but we do not subject the contract to the same degree of scrutiny as ‘[c]ontracts of adhesion that involve surprise or other sharp practices.’ "].)
This record contains no evidence of surprise, nor of sharp practices demonstrating substantive unconscionability. While Diaz argues in the introduction to her briefing that the agreement is substantively unconscionable, she fails to specify, with appropriate citations to the record and relevant legal authority, any terms of the agreement that she believes are unconscionable. Accordingly, Diaz has waived any argument that the agreement is unenforceable. ( Okorie v. Los Angeles Unified School Dist. (2017) 14 Cal.App.5th 574, 599-600, 222 Cal.Rptr.3d 475 [parties must present legal authority for all arguments made]; Benach v. County of Los Angeles (2007) 149 Cal.App.4th 836, 852, 57 Cal.Rptr.3d 363 [party raise or support issues by argument and citation to authority]; Berger v. California Ins. Guarantee Assn. (2005) 128 Cal.App.4th 989, 1007, 27 Cal.Rptr.3d 583 [parties must make coherent argument and cite authority in support of a contention; failure to do so waives the issue on appeal].)
DISPOSITION
The order denying the petition to compel arbitration is reversed and the matter is remanded for the trial court to conduct further proceedings consistent with this opinion. Appellant is to recover its costs on appeal.
I concur:
FEUER, J.
SEGAL, J., Dissenting.I agree an employee can impliedly accept an arbitration agreement by continuing to work for his or her employer. I also think an employee, like any other contracting party, can reject an arbitration agreement offered by an employer and yet continue to work for the employer. Whether an employer and an employee entered into an implied agreement regarding the terms of employment is a factual issue we routinely ask a trier of fact to decide in employment cases. Because the facts in this case do not support only one reasonable conclusion, I would defer to the trial court’s resolution of that factual issue.
"The issue of an implied agreement or consent is ordinarily a factual question to be resolved by the trier of fact." ( Antelope Valley Groundwater Cases (2018) 30 Cal.App.5th 602, 618, fn. 11, 241 Cal.Rptr.3d 692 ; see Foley v. Interactive Data Corp. (1988) 47 Cal.3d 654, 677, 254 Cal.Rptr. 211, 765 P.2d 373 [whether the parties’ conduct created an implied agreement is generally a question of fact]; Citizens for Amending Proposition L v. City of Pomona (2018) 28 Cal.App.5th 1159, 1189, 239 Cal.Rptr.3d 750 ["The existence and scope of implied-in-fact contracts are determined by the totality of the circumstances. [Citation.] ‘The question whether such an implied-in-fact agreement exists is a factual question for the trier of fact unless the undisputed facts can support only one reasonable conclusion.’ "]; Unilab Corp. v. Angeles-IPA (2016) 244 Cal.App.4th 622, 636, 198 Cal.Rptr.3d 211 ["Whether an implied contract exists ‘ " ‘is usually a question of fact for the trial court. Where evidence is conflicting, or where reasonable conflicting inferences may be drawn from evidence which is not in conflict, a question of fact is presented for decision of the trial court.’ " ’ "]; Kashmiri v. Regents of University of California (2007) 156 Cal.App.4th 809, 829, 67 Cal.Rptr.3d 635 ["the question whether the parties’ conduct creates ... an implied agreement is generally " ‘a question of fact" ’ "].) In the arbitration context, while "California law permits employers to implement policies that may become unilateral implied-in-fact contracts when employees accept them by continuing their employment," whether "employment policies create unilateral contracts is ‘a factual question in each case.’ " ( Gorlach v. Sports Club Co. (2012) 209 Cal.App.4th 1497, 1508, 148 Cal.Rptr.3d 71, quoting Asmus v. Pacific Bell (2000) 23 Cal.4th 1, 11, 96 Cal.Rptr.2d 179, 999 P.2d 71.)
Because we are reviewing the trial court’s resolution of a factual issue, I would not apply, as the majority does, a de novo standard of review. Indeed, I would not even apply a substantial evidence standard of review. I think the standard of review is much more onerous on the appellant in this case.
As the majority acknowledges, Sohnen had the burden of proving the existence of the implied arbitration agreement. (Maj. opn. at p. 830; see Pinnacle Museum Tower Assn. v. Pinnacle Market Development (US), LLC (2012) 55 Cal.4th 223, 236, 145 Cal.Rptr.3d 514, 282 P.3d 1217 ["[t]he party seeking arbitration bears the burden of proving the existence of an arbitration agreement"]; Cohen v. TNP 2008 Participating Notes Program, LLC (2019) 31 Cal.App.5th 840, 859, 243 Cal.Rptr.3d 340 [same].) The trial court found Sohnen failed to meet its burden. In this situation, we do not review the record to determine whether substantial evidence supports the trial court’s finding, but whether the evidence compels the opposite finding as a matter of law. Thus, where the trier of fact, here the trial court ruling on a motion to compel arbitration, " ‘expressly or implicitly concluded that the party with the burden of proof did not carry the burden and that party appeals, it is misleading to characterize the failure-of-proof issue as whether substantial evidence supports the judgment. ... [¶] [W]here the issue on appeal turns on a failure of proof at trial, the question for a reviewing court becomes whether the evidence compels a finding in favor of the appellant as a matter of law. [Citations.] Specifically, the question becomes whether the appellant’s evidence was (1) "uncontradicted and unimpeached" and (2) "of such a character and weight as to leave no room for a judicial determination that it was insufficient to support a finding." ’ " ( Dreyer’s Grand Ice Cream, Inc. v. County of Kern (2013) 218 Cal.App.4th 828, 838, 159 Cal.Rptr.3d 832 ; accord, Glovis America, Inc. v. County of Ventura (2018) 28 Cal.App.5th 62, 71, 238 Cal.Rptr.3d 895 ; Atkins v. City of Los Angeles (2017) 8 Cal.App.5th 696, 734, 214 Cal.Rptr.3d 113.) For this reason, " ‘[w]here, as here, the judgment is against the party who has the burden of proof, it is almost impossible for him to prevail on appeal by arguing the evidence compels a judgment in his favor. That is because unless the trial court makes specific findings of fact in favor of the losing plaintiff, we presume the trial court found the plaintiff’s evidence lacks sufficient weight and credibility to carry the burden of proof. [Citations.] We have no power on appeal to judge the credibility of witnesses or to reweigh the evidence.’ " ( Patricia A. Murray Dental Corp. v. Dentsply Internat., Inc. (2018) 19 Cal.App.5th 258, 270, 227 Cal.Rptr.3d 862.)
The evidence does not compel a finding Diaz and Sohnen impliedly agreed to arbitrate. The evidence shows Diaz attended a meeting on December 2, 2016, where Marla Carr, Sohnen’s chief operating officer, and Eliana Diaz, an employee in the human resources department, announced the company was implementing a new arbitration policy. Carr and Eliana Diaz gave the employees copies of the new dispute resolution agreement, "in English and Spanish, to take home and review." Eliana Diaz and Carr, however, had different recollections of the chronology of events. Eliana Diaz did not state in her declaration that employees were told on December 2, 2016 that, even if they refused to sign the arbitration agreement, continuing to work at the company would constitute acceptance of the agreement. Eliana Diaz stated it was not until December 19, 2016 that, during a private meeting with Diaz, she read Diaz a document stating, "If you continue working for Sohnen Enterprises on or after December 20, 2016, your actions will be viewed just as if you signed the [arbitration agreement]." Eliana Diaz also stated in her declaration that, in the meantime, Diaz told her on December 14, 2016 she would not sign the arbitration agreement. Eliana Diaz also said that on December 23, 2016 Sohnen received a letter from Diaz’s attorney dated December 20, 2016 again rejecting the arbitration agreement. The letter from counsel for Diaz stated: "This letter will serve as a formal response [to], and rejection of, the attempt at obtaining Ms. Erika Diaz’[s] agreement to forced arbitration as set forth in an agreement presented to her on, or about, 12-2-16." The letter also stated that Diaz "intends to, and will continue, with [sic ] her employment by Sohnen Enterprises on all the terms, and conditions, of her employment in effect prior to the presentation to her of the [arbitration agreement]."
On the other hand, Carr stated in her declaration that at the December 2, 2016 meeting she "explained in English the basic terms of the [arbitration agreement]" and "[s]pecifically" told the employees that "continued employment would constitute acceptance" of the agreement. The documentary evidence, however, does not support this statement in her declaration. The memorandum advising Diaz that Sohnen would consider continued employment as acceptance is dated December 19, not December 2. In addition, the December 19 memorandum suggests that it was the first time the company had made this statement and that Diaz had until the next day to decide (presumably demonstrated by continuing to work, because Diaz had already said she was not going to sign the arbitration agreement) whether she would agree to the arbitration provision. The document states: "This memo is to inform you that if you continue working for Sohnen Enterprises on or after December 20, 2016, you will be deemed for all purposes to have accepted the terms of the [arbitration agreement]." (Italics added.) Counsel for Diaz wrote his letter the next day.
This evidence created factual disputes and supported different reasonable conclusions about what happened and whether Diaz impliedly agreed to Sohnen’s proposed arbitration agreement. The trial court resolved this conflict in favor of Diaz and ruled the parties did not reach an implied agreement to arbitrate. The court stated, "You can’t have an agreement where one side says, ‘This is the deal,’ and the other side says, ‘No, this is not the deal,’ " and the court found "there [was] no meeting of the minds." We do not have the authority to reweigh the evidence and come to a different conclusion, let alone conclude the evidence compels a finding the parties did enter into an implied agreement.There was also a conflict in the evidence concerning whether the employees needed to sign the arbitration agreement in order to accept it. The arbitration agreement stated it had to be accepted in writing: "[B]y my signature below ... I agree to comply with and be bound by this Agreement." But Carr stated she told the employees they could accept the arbitration agreement, even if they did not sign it, by continuing to work there. Which was it? Again, the trial court resolved this conflict against Sohnen and found Diaz did not accept the agreement, a finding we should respect on appeal. (See Guz v. Bechtel National, Inc. (2000) 24 Cal.4th 317, 337, 100 Cal.Rptr.2d 352, 8 P.3d 1089 ["Where there is no express agreement, the issue is whether other evidence of the parties’ conduct has a ‘tendency in reason’ ( Evid. Code, § 210 ) to demonstrate the existence of an actual mutual understanding on particular terms and conditions of employment. If such evidence logically permits conflicting inferences, a question of fact is presented."].) The trial court’s ruling was also consistent with California cases holding that courts will not imply an employee’s consent to an arbitration agreement where the agreement requires the employee’s signature to be effective. (See Gorlach v. Sports Club Co. , supra , 209 Cal.App.4th at p. 1509, 148 Cal.Rptr.3d 71 [court would not "imply the existence of [an arbitration] agreement" where "the handbook told employees that they must sign the arbitration agreement, implying that it was not effective until (and unless) they did so," and the employee "never signed the arbitration agreement"]; Mitri v. Arnel Management Co. (2007) 157 Cal.App.4th 1164, 1172-1173, 69 Cal.Rptr.3d 223 [no implied agreement to arbitrate where the agreement’s "express term requir[ed] a signed agreement"].)
None of the cases the majority or Sohnen cites involved a plaintiff who expressly rejected the arbitration agreement, as Diaz did here twice (once orally and once in writing). (See Scott v. Education Management Corporation (3d Cir. 2016) 662 Fed.Appx. 126, 130-131 [continuing to work did not constitute an implied agreement to an arbitration provision where the employees "promptly voiced their specific objection to and rejection of the ADR policy" and, "[r]ather than indicate their assent, both men quite clearly expressed their strong disagreement with its terms"]; Bayer v. Neiman Marcus Holdings, Inc. (N.D.Cal. Nov. 8, 2011, No. CV 11-3705 MEJ), 2011 WL 5416173, at p. 5 [employee did not impliedly agree to an arbitration agreement where the employee refused to sign the arbitration agreement and told his supervisors he was not agreeing to the employer’s arbitration program]; Kunzie v. Jack-In-The-Box, Inc. (Mo.Ct.App. 2010) 330 S.W.3d 476, 486 [employee’s "rejection [of an arbitration agreement] and continued employment, under basic contract principles, reasonably could be viewed as [the employee’s] counteroffer to [the employer] that [the employee] would continue his employment without being subject to [the employer’s] arbitration policy," and the employer’s "failure to then terminate [the employee’s] employment could be deemed to constitute an acceptance of such counter-offer"].) Presented with evidence of those two express rejections and, at most, 18 days (December 2 to December 20, 2016) of continued employment, the trial court was entirely justified in giving the former more weight than the latter, and we should defer to that finding. (See Haworth v. Superior Court (2010) 50 Cal.4th 372, 385, 112 Cal.Rptr.3d 853, 235 P.3d 152 [trial courts "generally are in a better position to evaluate and weigh the evidence"]; Tucker v. Pacific Bell Mobile Services (2010) 186 Cal.App.4th 1548, 1562, 115 Cal.Rptr.3d 9 [" ‘[i]t is the exclusive function of the trial court to weigh the evidence, resolve conflicts and determine the credibility of witnesses’ "]; see also Haraguchi v. Superior Court (2008) 43 Cal.4th 706, 711, fn. 3, 76 Cal.Rptr.3d 250, 182 P.3d 579 ["that the trial court’s findings were based on declarations and other written evidence does not lessen the deference due those findings"]; Ramos v. HomewardResidential, Inc. (2014) 223 Cal.App.4th 1434, 1441, 168 Cal.Rptr.3d 114 ["we defer to factual determinations made by the trial court when the evidence is in conflict, whether the evidence consists of oral testimony or declarations"]; Poniktera v. Seiler (2010) 181 Cal.App.4th 121, 130, 104 Cal.Rptr.3d 291 ["we resolve all conflicts in favor of the judgment, even when (as here) the trial court’s decision is based on evidence received by declaration rather than by oral testimony"].)
The cases the majority cites are also factually distinguishable. Pinnacle Museum Tower Assn. v. Pinnacle Market Development (US), LLC, supra , 55 Cal.4th 223, 145 Cal.Rptr.3d 514, 282 P.3d 1217 did not involve an implied agreement to arbitrate, by conduct or otherwise. In that case there was a written arbitration agreement in the applicable CC&Rs. ( Id. at p. 231, 145 Cal.Rptr.3d 514, 282 P.3d 1217.) The court in Craig v. Brown & Root, Inc. (2000) 84 Cal.App.4th 416, 100 Cal.Rptr.2d 818 held the employee’s continued employment constituted acceptance of an arbitration agreement her employer had proposed. ( Id. at pp. 420-421, 100 Cal.Rptr.2d 818.) But the employee in that case continued to work at the company for four years ( id. at pp. 418, 421, 100 Cal.Rptr.2d 818 ), without ever saying a word about the arbitration agreement, whereas Diaz continued to work at Sohnen one day or 18 days and expressly rejected the arbitration agreement twice. And in Harris v. TAP Worldwide, LLC (2016) 248 Cal.App.4th 373, 203 Cal.Rptr.3d 522 the employer gave the employee the arbitration agreement when the employee began working full time, and the employee worked at the company for at least a year (and perhaps three) before the company terminated his employment. (See id. at pp. 376-377, 203 Cal.Rptr.3d 522.) Again, a far cry from the (at most) 18 days Diaz continued to work at Sohnen before she rejected the agreement in writing.Neither Schachter v. Citigroup, Inc. (2009) 47 Cal.4th 610, 101 Cal.Rptr.3d 2, 218 P.3d 262 nor DiGiacinto v. Ameriko-Omserv Corp. (1997) 59 Cal.App.4th 629, 69 Cal.Rptr.2d 300, both cited by the majority, involved an arbitration agreement, express or implied. (See Gorlach v. Sports Club Co. , supra , 209 Cal.App.4th at p. 1510, 148 Cal.Rptr.3d 71 [" ‘ DiGiacinto v. Ameriko-Omserv Corp. [did not] address[ ] whether an arbitration agreement existed between an employer and employee’ "]; Mitri v. Arnel Management Co. , supra , 157 Cal.App.4th at p. 1171, 69 Cal.Rptr.3d 223 [same].) Certainly, as the majority points out (maj. opn. at p. 831), "California law permits employers to implement policies that may become unilateral implied-in-fact contracts when employees accept them by continuing their employment." ( Asmus v. Pacific Bell , supra , 23 Cal.4th at p. 11, 96 Cal.Rptr.2d 179, 999 P.2d 71.) But here the evidence was disputed whether Sohnen made such a unilateral change in the terms of Diaz’s employment. There was some evidence Sohnen intended to implement arbitration unilaterally, which Diaz could accept by continued employment, but there was also evidence Sohnen intended to implement arbitration as part of a bilateral agreement, which, as stated, Diaz could accept by signing the agreement. Indeed, the language of the arbitration agreement suggested that the parties were intending to exchange mutual promises, not that Sohnen was implementing arbitration unilaterally. The arbitration agreement states, "By this Agreement, you and Sohnen Enterprises ... agree to resolve by arbitration any and all disputes arising out of or related to your employment by [Sohnen]." (Italics added.) The agreement also states, "By mutually agreeing to arbitrate covered disputes, we both recognize that these disputes will not be resolved by a court or jury." (Italics added.) (See Bleecher v. Conte (1981) 29 Cal.3d 345, 350, 213 Cal.Rptr. 852, 698 P.2d 1154 ["[a] bilateral contract is one in which there are mutual promises given in consideration of each other"].) The trial court again resolved these factual issues in favor of Diaz. (See Asmus , at p. 11, 96 Cal.Rptr.2d 179, 999 P.2d 71 ["whether employment policies create unilateral contracts will be a factual question in each case"]; Davis v. Jacoby (1934) 1 Cal.2d 370, 378, 34 P.2d 1026 [in many cases, "whether the particular offer is one to enter into a bilateral or unilateral contract" depends on "the intent of the offerer and the facts and circumstances of the case"].)
The defendant in Harris terminated the plaintiff’s employment in December 2013. (Harris v. TAP Worldwide, LLC , supra , 248 Cal.App.4th at p. 376, 203 Cal.Rptr.3d 522.) The new arbitration policy went into effect in January 2010. (Id. at p. 379, 203 Cal.Rptr.3d 522.) The plaintiff stated he signed the acknowledgement of receipt of the documents containing the arbitration provision in September 2012, "but the year was erroneously listed as 2010." (Id. at p. 377, 203 Cal.Rptr.3d 522.)
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Finally, I believe that courts, not employers, should determine whether there is an implied agreement to arbitrate. That the employer told its employees continued employment would constitute acceptance, or that the employer gave the employee a reasonable period of time to consider whether to sign an arbitration agreement, is evidence that may support a finding the parties entered into an implied agreement. But it is not the only evidence a trier of fact can consider. The majority’s decision takes from courts the power to determine whether (the party seeking to compel arbitration has met its burden of proving) the evidence shows an implied agreement to arbitrate, because the decision gives employers the unilateral power to create an implied agreement simply by announcing that continued employment will constitute acceptance, no matter how strongly or clearly the employee manifests his or her rejection of the proposed agreement. Carr’s memorandum stated that continuing to work for Sohnen would "be viewed" as acceptance. The issue for me is, "viewed" by whom? I believe the "viewer" should be the court, not the employer.
Because in my opinion the majority applies the wrong standard of review and does not give sufficient deference to the trial court’s resolution of the factual issues in this case, I respectfully dissent.
Compensate All Time Worked
All time worked must be compensated
Rodriguez v. Nike Retail Services, Inc.
SOURCE:
KEY WORDS:
Federal Labor Law, Wage, Time Calculation
AGENCY:
UNITED STATES COURT OF APPEALS FOR THE NINTH CIRCUIT
B289506
ISAAC RODRIGUEZ, as an individual and on behalf of all others similarly situated,Plaintiff - Appellant, v. NIKE RETAIL SERVICES,INC., Defendant - Appellee. | B289506 Mar 29, 201933 Cal.App.5th 920 (Cal. Ct. App. 2019) |
_________________________
WILEY, J.
This employment case concerns a choice-of-law clause in an arbitration agreement. The trial court interpreted the clause to mean some but not all individual employment claims must be arbitrated. We conclude all of them must be arbitrated.
The facts are simple. RADC Enterprises, Inc. hired Mel R. Bravo to manage a store. The parties signed a two-page arbitration agreement covering "all disputes" arising from the employment relationship. On page two, near the end, the agreement added a one-sentence choice-of-law provision: "This Agreement shall be governed by and shall be interpreted in accordance with the laws of the State of California."
After RADC fired him, Bravo sued RADC on individual employment claims, as well as on representative claims under the Private Attorneys General Act of 2004 (PAGA). RADC moved to stay Bravo’s PAGA claims and to compel arbitration on his individual claims.
The trial court severed and stayed the PAGA claims. The court found RADC engaged in interstate commerce and thus the Federal Arbitration Act governed the agreement. But the court compelled arbitration for only three of Bravo’s nine individual claims, denying the arbitration motion on the remaining six individual claims. The logic was that, while the Federal Arbitration Act did apply, the choice-of-law sentence meant the parties wanted California law to govern their relationship. California Labor Code section 229 directs courts to disregard agreements to arbitrate wage claims, so the trial court declined to send Bravo’s remaining claims to arbitration. ( Lab. Code, § 229.) On appeal, RADC correctly contends the choice-of-law provision did not mean the parties wanted to oust arbitration from their arbitration agreement. RADC rightly says the trial court should have sent all Bravo’s individual claims to arbitration.
We independently review contract interpretation where, as here, there is no extrinsic evidence about contract meaning and the facts are undisputed.
As RADC correctly explains, the choice-of-law clause does not remove any arbitration from this arbitration agreement. The first textual clue is the title: "ARBITRATION AGREEMENT." This agreement is for arbitration and not against it.
The text of the agreement swiftly announces its objective: the parties will arbitrate "any and all disputes" arising from Bravo’s employment, "including any claims brought by the Employee related to wages" under the California Labor Code. The main point of the deal was to arbitrate all employment disputes. The parties could not have intended to apply Labor Code section 229 to this contract because that section prohibits arbitrating wage claims and requires courts to disregard private agreements to arbitrate. ( Lab. Code, § 229.) Applying this California law would contradict the parties’ intent to arbitrate "any and all disputes," including claims "related to wages ...."
Interpreting the choice-of-law provision to negate the purpose of the two-page agreement is incorrect. Readers must assume legal authors mean to draft texts that cohere. To assume otherwise departs from common sense and makes mischief. So we read documents to effectuate and harmonize all contract provisions. (E.g., Mastrobuono v. Shearson Lehman Hutton, Inc. (1995) 514 U.S. 52, 63, 115 S.Ct. 1212, 131 L.Ed.2d 76.) Bravo’s interpretation of the choice-of-law provision in this agreement is untenable because it unnecessarily sets one clause in conflict with the rest of the agreement. ( Id. at p. 64, 115 S.Ct. 1212.)
The choice-of-law provision becomes consistent with the parties’ intent to arbitrate all disputes when we read "the laws of the State of California" to include substantive principles California courts would apply, but to exclude special rules limiting the authority of arbitrators. (See Mastrobuono, supra, 514 U.S. at pp. 63–64, 115 S.Ct. 1212 ; Preston v. Ferrer (2008) 552 U.S. 346, 363, 128 S.Ct. 978, 169 L.Ed.2d 917.) This arbitration agreement is like the one in Preston v. Ferrer , which contained a similar choice-of-law provision. The Supreme Court of the United States interpreted that agreement as we interpret this one. ( Id. at pp. 362–363, 128 S.Ct. 978.)
The trial court cited Mastick v. TD Ameritrade, Inc. (2012) 209 Cal.App.4th 1258, 1264, 147 Cal.Rptr.3d 717, which does not apply here. Mastick involved Code of Civil Procedure section 1281.2, subdivision (c). That statute is not at issue here. The same goes for Volt Information Sciences, Inc. v. Board of Trustees of Leland Stanford Junior University (1989) 489 U.S. 468, 471, 475–477, 109 S.Ct. 1248, 103 L.Ed.2d 488. Code of Civil Procedure section 1281.2, subdivision (c) permits a court to refuse to enforce an arbitration agreement or stay arbitration pending resolution of related litigation between a party to the arbitration agreement and third parties not bound by it, where there is a possibility of conflicting rulings on a common issue of law or fact. ( Id . at p. 471, 109 S.Ct. 1248.) There are no third parties in this case. Cases dealing with this third-party statute do not apply where there are no third parties.
DISPOSITION
We affirm part of the trial court’s order and reverse part of it. We affirm the part severing the agreement provision requiring the parties to arbitrate the PAGA claims. We also affirm the order granting RADC’s motion as to three individual claims. We reverse the order denying the motion as to the remaining six individual claims. RADC is awarded costs on appeal.
WE CONCUR:
GRIMES, Acting P. J.
ADAMS, J.
Judge of the Los Angeles Superior Court, assigned by the Chief Justice pursuant to article VI, section 6 of the California Constitution.
--------
Not Required to Reimburse Employees
Not Required to Reimburse EmployeesTownley v. BJ’s Restaurants, Inc.
SOURCE:
KEY WORDS:
Federal Labor Law, Wage, Time Calculation
AGENCY:
THE COURT OF APPEAL OF THE STATE OF CALIFORNIA THIRD APPELLATE DISTRICT
C086672
KRISTA TOWNLEY, Plaintiff and Appellant, v. BJ'S RESTAURANTS, INC., Defendant and Respondent | C086672 (Super. Ct. No. STKCVUOE20140003168) |
_________________________
OPINION
BUTZ, Acting P. J.—
Plaintiff Krista Townley (Townley) appeals from the judgment entered after the trial court granted summary judgment in favor of defendant BJ's Restaurants, Inc. (BJ's), on her sole cause of action under the Labor Code Private Attorneys General Act of 2004 (Lab. Code, § 2698 et seq.; PAGA),[1] which sought civil penalties on behalf of herself and other "aggrieved employees" for Labor Code violations.[2] In this appeal, we are asked to determine whether section 2802 requires an employer to reimburse its employees for the cost of slip-resistant shoes as "necessary expenditures . . . incurred by the employee[s] in direct consequence of the discharge of [their] duties." (§ 2802, subd. (a).) Because we conclude the statute does not impose such a requirement, we affirm the judgment.
FACTUAL AND PROCEDURAL BACKGROUND
The relevant facts are undisputed. BJ's is a California corporation that operates 63 restaurants in California. From approximately April 2011 to April 2013, Townley worked at a BJ's restaurant in Stockton as a server.
To avoid slip and fall accidents, BJ's adopted a safety policy that required all hourly restaurant employees to wear black, slip-resistant, closed toe shoes. The policy did not require employees to purchase a specific brand, style, or design of shoes. Nor did the policy prohibit employees from wearing their shoes outside of work.
During her employment with BJ's, Townley purchased a pair of canvas shoes that complied with BJ's policy but was not reimbursed for the cost of the shoes, which was consistent with BJ's policy and practice.
In April 2014, Townley filed a class and representative action against BJ's, alleging two PAGA claims for Labor Code violations.[3] In October 2015, she filed a first amended complaint, styled as a representative action, alleging one PAGA claim, seeking civil penalties on behalf of herself and other "aggrieved employees" for Labor Code violations. In support of her PAGA claim, Townley alleged: "[BJ's] failed to reimburse restaurant employees for a business expense associated with a required safety item. In particular, BJ's requires hourly restaurant employees to wear `slip resistant, black, close-toed shoes' for safety reasons. Employers are required to furnish and provide safety equipment to employees free of charge pursuant to [workplace safety standards in] Labor Code §§ 6401 and 6403. [Citation.] . . . [BJ's] did not provide such shoes free of cost, or reimburse restaurant employees for their cost, all in violation of Labor Code § 2802. Violations of Labor Code § 2802 give[] rise to a PAGA action under Labor Code § 2699.5."
In October 2017, BJ's filed a motion for summary judgment. It argued, among other things, that Townley's PAGA claim failed because BJ's is not 182*182 required, as a matter of law, to reimburse its hourly restaurant employees for the cost of slip-resistant shoes under the Labor Code. In her opposition, Townley abandoned her "PAGA theory based on violations of §§ 6401 and 6403,"[4] stating that the first amended complaint's "reference to a . . . duty under Cal-OSHA §§ 6401 and 640[3] to provide safety items is an alternative theory of liability that [Townley] has chosen not to pursue." Instead, Townley argued that summary judgment was improper because BJ's had failed to show that it was not required to reimburse its employees for the cost of slip-resistant shoes under section 2802, which requires an employer to reimburse "employee[s] for all necessary expenditures . . . incurred by the employee[s] in direct consequence of the discharge of [their] duties. . . ." (§ 2802, subd. (a).) Townley maintained that "[BJ's] arguments about [her] ability to prove a Cal-OSHA violation have no relevance to [her] actual PAGA claim, which is based solely on [BJ's] violation of its reimbursement obligations under § 2802." Townley argued that "§ 2802 imposes an independent duty [on an employer] to reimburse employees' business expenses that they incurred in order to perform their duties to the employer, regardless of any other statutory or regulatory obligation that also may exist, including under Cal-OSHA or . . . Wage Order [No. 5]."[5] In reply, BJ's argued that Townley's "attempt to apply . . . § 2802 in a way that would mandate reimbursement for slip-resistant footwear is preempted by the Federal Occupational Safety and Health Act of 1970 [OSHA], which does not require employers to pay for slip-resistant shoes." BJ's further argued that, "[e]ven assuming arguendo that . . . § 2802 is not preempted by [OSHA], [Townley's PAGA] claim still 183* fails because employers are not required to provide or pay for non-uniform work clothing under California law."
In January 2018, the trial court granted summary judgment, finding that Townley could not establish that BJ's violated California law by failing to reimburse its employees for the cost of slip-resistant shoes. In so ruling, the court concluded that the Occupational Safety and Health Act of 1970 (OSHA; 29 U.S.C. § 651 et seq.) and Cal-OSHA specifically provide that an employer is not required to reimburse employees for the cost of non-specialty shoes that offer some slip-resistant characteristics, but are otherwise ordinary clothing in nature.[6] The court further concluded that because the reimbursement exception under OSHA and Cal-OSHA for non-specialty, slip-resistant shoes is more specific than the general reimbursement language in section 2802, it must harmonize the seemingly conflicting statutes by interpreting section 2802 to mean that the cost of slip-resistant shoes is not a "necessary expenditure" within the meaning of the statute.
Following the entry of judgment, Townley filed a timely notice of appeal.
DISCUSSION
1.0 Standard of Review
We review an order granting summary judgment de novo. (Aguilar v. Atlantic Richfield Co. (2001) 25 Cal.4th 826, 860 [107 Cal.Rptr.2d 841, 24 P.3d 493].) We make an independent assessment of the correctness of the trial court's ruling, applying the same legal standard as the trial court in determining whether there is no triable issue as to any material fact and the moving party is entitled to a judgment as a matter of law. (Doe v. Good Samaritan Hospital (2018) 23 Cal.App.5th 653, 661 [233 Cal.Rptr.3d 199].) 184* "`We will affirm a summary judgment if it is correct on any ground, as we review the judgment, not its rationale.'" (Marshall v. County of San Diego (2015) 238 Cal.App.4th 1095, 1107 [190 Cal.Rptr.3d 97].)
2.0 The Trial Court Properly Granted Summary Judgment
Townley contends the trial court erred in granting summary judgment because BJ's is required, as a matter of law, to reimburse its employees for the cost of slip-resistant shoes under section 2802. According to Townley, the slip-resistant shoes at issue in this case are not items regulated by either OSHA or Cal-OSHA, as BJ's required its employees to wear the shoes as part of a company safety policy, not to comply with the requirements of OSHA or Cal-OSHA. Because we assume for purposes of this appeal that section 2802 applies, we need not and do not decide the applicability of OSHA or Cal-OSHA. For the reasons stated post, we will affirm the judgment.
In 2015, the United States Court of Appeals, Ninth Circuit, in an unpublished opinion, decided the identical issue presented in this appeal. In that case, the court held that section 2802 did not require Denny's Inc. (Denny's) to reimburse its employees for the cost of slip-resistant shoes. (Lemus v. Denny's Inc. (9th Cir. 2015) 617 Fed.Appx. 701, *703 (Lemus).)[7] In so holding, the court reasoned as follows: "It is not necessary to decide the applicability of OSHA or CAL/OSHA, because, even if section 2802 applies, it does not require Denny's to reimburse the cost of its employees' slip-resistant footwear. California Labor Code section 2802[, subdivision] (a) provides that `[a]n 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.' Lemus has not presented any authority that has applied section 2802 in a way that requires an employer to pay for an employee's non-uniform work clothing. Nor can he, because (under California law) a restaurant employer must only pay for its employees' work clothing if the clothing is a `uniform' or if the clothing qualifies as certain protective apparel regulated by CAL/OSHA or OSHA. See Cal. Code Regs. tit. 8, § 11050(9)(A)(2001)." (Lemus, at p. 703.)
185* The Ninth Circuit explained, "California's Division of Labor Standards Enforcement (`DLSE') has clarified:[[8]] [¶] `The definition and [DLSE] enforcement policy is sufficiently flexible to allow the employer to specify basic wardrobe items which are usual and generally usable in the occupation, such as white shirts, dark pants and black shoes and belts, all of unspecified design, without requiring the employer to furnish such items. If a required black or white uniform or accessory does not meet the test of being generally usable in the occupation the emplolyee [sic] may not be required to pay for it.' [¶] Cal. Office of the State Labor Comm'r, Div. of Labor Standards Enforcement, Dep't of Indus. Relations, Opinion Letter No. 1990.09.18 1 (1990) (alteration in original). Lemus has not argued that the black, slip-resistant shoes that he purchased were part of a `uniform' or were not `generally usable in the [restaurant] occupation.' [Citation.] In fact, Lemus's counsel conceded at oral argument that this was not a uniform situation. Therefore, despite the general indemnification provision in section 2802, under California labor law, Denny's is not required to provide the cost of slip-resistant footwear. Thus, the district court did not err in granting summary judgment to Denny's on this claim." (Lemus, supra, 617 Fed.Appx. at p. 703, fn. omitted.)[9]
We are persuaded by the reasoning of Lemus and follow it here. We conclude that BJ's is not required, as a matter of law, to reimburse its employees for the cost of the slip-resistant shoes at issue in this case under section 2802. The cost of the shoes does not qualify as a "necessary expenditure" within the meaning of the statute. Here, like in Lemus, Townley has not argued that the slip-resistant shoes she was required to purchase were part of a uniform or were not usual and generally usable in the restaurant occupation. Further, she does not cite any authority holding that an employer is required, under section 2802, to reimburse an employee for basic, non-uniform wardrobe items, such as the slip-resistant shoes at issue in this case.[10] Accordingly, the trial court did not err in granting summary judgment.
DISPOSITION
The judgment is affirmed. Costs on appeal are awarded to BJ's. (Cal. Rules of Court, rule 8.278(a)(1), (2).)
Duarte, J., and Renner, J., concurred.
Compensation for Walk Time
Compensation for Walk Time
Stoetzl v. Dept. of Human Resources
SOURCE:
KEY WORDS:
Union, Unrepresented Workers, Postwork Time, Wage, Time Calculation
AGENCY:
THE SUPREME COURT OF CALIFORNIA, First Appellate District, Division Four
S244751
KURT STOETZL et al., Plaintiffs and Appellants v. DEPARTMENT OF HUMAN RESOURCES et al., Defendants and Respondents. | S244751 First Appellate District, Division Four A142832 San Francisco City and County Superior Court CJC11004661 |
_________________________
OPINION
CHIN, J.—
In this case, we decide whether a certified class of state correctional employees is entitled to additional compensation for time spent on pre- and postwork activities, including traveling from the outermost gate of the prison facility to their work posts within the facility, traveling back from their work posts to the outermost gate, being briefed before the start of a shift, briefing relief staff at the end of a shift, checking out and checking back in mandated safety equipment, putting on and removing such equipment, and submitting to searches at various security checkpoints within the facility. For convenience, we will refer to the time spent doing these pre- and postwork activities as "walk time" although we recognize that walk time includes many activities besides merely walking to and from a work post. There are two types of walk time that are relevant here. The first is the time a correctional employee spends after arriving at a prison's outermost gate but before beginning the first activity the employee is employed to perform (plus analogous time at the end of the employee's work shift). We will call this type of walk time "entry-exit walk time." The second is the time a correctional employee spends after beginning the first activity the employee is employed to perform but before the employee arrives at his or her assigned work post (plus analogous time at the end of the employee's work shift). We will call this type of walk time "duty-integrated walk time."[1]
The trial court divided the plaintiff class into two subclasses, one for supervisory employees who were not represented by a union during the time period set forth in the class certification and the other for represented employees. We conclude that the subclass of represented plaintiffs expressly agreed, by way of the collective bargaining process, to a specific amount of compensation for duty-integrated walk time, and there is no allegation that the state failed to pay the agreed-upon amount. Moreover, the collective bargaining agreements that memorialized this agreement all provided that they constituted the entire understanding of the parties concerning matters contained therein, and thus they precluded other forms of compensation, such as compensation for entry-exit walk time. These agreements were approved by the Legislature, and each approval was signed by the Governor and chaptered into law, thus becoming specific legislation applicable to the represented plaintiffs and superseding more general laws to the extent of any conflict. Therefore, the represented plaintiffs' claims fail insofar as they seek additional compensation for either duty-integrated walk time or entry-exit walk time.
As to the subclass of unrepresented plaintiffs, we conclude that they may be entitled to additional compensation for duty-integrated walk time. The terms and conditions that govern the employment of the unrepresented plaintiffs are determined by the Department of Human Resources (CalHR) and set forth in a manual known as the "Pay Scale Manual" and also in CalHR's regulations. The Pay Scale Manual defines compensable worktime for purposes of calculating an employee's right to regular and overtime compensation, and duty-integrated walk time falls squarely within that definition. If, as is alleged, the state did not take duty-integrated walk time into consideration when calculating the compensation owed to the unrepresented plaintiffs, then those plaintiffs may be entitled to additional pay.
Entry-exit walk time, by contrast, does not fall within the Pay Scale Manual's definition of compensable worktime. Moreover, because the Pay Scale Manual comprehensively addresses the question of compensation for the unrepresented plaintiffs, it precludes compensation for any worktime that falls outside the scope of its definition. Therefore, insofar as the unrepresented plaintiffs are seeking compensation for entry-exit walk time, their claims must be rejected.
The Court of Appeal reached somewhat different conclusions, and therefore we reverse its judgment.
I. FACTS AND PROCEDURAL BACKGROUND
A. Pretrial Proceedings
This matter arises from the coordination (see Code Civ. Proc., § 404 et seq.; Cal. Rules of Court, rule 3.501 et seq.) and joint disposition of three class-action complaints. The named defendants are the State of California and various departments of the state government. In each of the operative complaints, plaintiffs allege causes of action for (1) failure to pay contractual overtime in violation of Labor Code sections 222 and 223; (2) failure to pay the minimum wage in violation of Labor Code sections 1182.11, 1182.12, and 1194, and in violation of the applicable wage orders (Cal. Code Regs., tit. 8, § 11000 et seq.); (3) failure to keep accurate records of hours worked in violation of Labor Code section 1174; and (4) failure to pay contractual overtime in breach of common law contractual obligations. The gist of all these claims is that the state did not adequately compensate plaintiffs for walk time. Plaintiffs seek relief in the form of unpaid overtime compensation, unpaid California minimum-wage compensation, liquidated damages, injunctive relief, and attorneys' fees.
The trial court granted class certification in all three actions, and it certified two plaintiff subclasses, one comprising unrepresented supervisory employees and the other comprising represented employees. Defendants then moved for judgment on the pleadings, which the trial court granted as to the causes of action for failure to pay contractual overtime in violation of Labor Code sections 222 and 223, and for failure to keep accurate records of hours worked in violation of Labor Code section 1174. The trial court ruled that Labor Code sections 222, 223, and 1174 are inapplicable to the state government. As to plaintiffs' other two causes of action, the trial court denied defendants' motion.
The matter then proceeded to trial, but the parties stipulated that the trial could proceed in multiple phases. In the first phase, several threshold questions were tried to the court. A brief overview of two regulatory schemes is helpful to understand the threshold questions tried at the first phase.
B. Regulatory Background
1. Wage Order No. 4
The Industrial Welfare Commission (IWC) was created in 1913 with express authority to adopt regulations—called wage orders—governing wages, hours, and working conditions in the state of California. (Stats. 1913, ch. 324, § 6, pp. 634-635; see Martinez v. Combs (2010) 49 Cal.4th 35, 52-57 [109 Cal.Rptr.3d 514, 231 P.3d 259] (Martinez) [describing the creation and role of the IWC].)[2] These wage orders, being the product of quasi-legislative rulemaking under a broad delegation of legislative power, are entitled to great deference, and they have the dignity and force of statutory law. (Brinker Restaurant Corp. v. Supreme Court (2012) 53 Cal.4th 1004, 1027 [139 Cal.Rptr.3d 315, 273 P.3d 513] (Brinker); see Martinez, at p. 61.) Our past cases have used the term "extraordinary" to describe this deference (Martinez, at p. 61), noting in this context that the Legislature's authority to delegate its legislative power to the IWC is expressly recognized in the state's Constitution (Martinez, at pp. 60-61). It remains true, of course, that the Legislature can enact statutes that supersede the wage orders—as occurred in the case of the Eight-Hour-Day Restoration and Workplace Flexibility Act of 1999 (Stats. 1999, ch. 134, pp. 1820-1830)—but courts must seek to harmonize IWC wage orders with statutes to the extent possible (Brinker, at p. 1027).
IWC wage order No. 4-2001, which is at issue here, governs wages, hours, and working conditions in professional, technical, clerical, mechanical, and similar occupations. (IWC wage order No. 4-2001 (Wage Order No. 4); see Cal. Code Regs., tit. 8, § 11040.) Wage Order No. 4 includes a minimum wage section, which requires employers to pay their employees at not less than a designated hourly rate "for all hours worked" (Wage Order No. 4, § 4(A)(1)), and an overtime section, which defines regular hours and requires employers to pay their employees at an appropriate multiplier of their regular rate "for all hours worked" in excess of those regular hours (Wage Order No. 4, § 3(A)(1)).
Both the minimum wage and the overtime sections of Wage Order No. 4 refer to "all hours worked," which the wage order defines as "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." (Wage Order No. 4, § 2(K), italics added.) The parties refer to this definition of compensable worktime as the "control standard." Under applicable case law, an argument can be made that both types of walk time at issue in this case fall within this definition. (See Morillion v. Royal Packing Co. (2000) 22 Cal.4th 575, 587-588 [94 Cal.Rptr.2d 3, 995 P.2d 139] (Morillion) [holding that compulsory travel time on an employer's buses, to and from agricultural fields, is compensable under the wage order "hours worked" definition, because the employees are subject to employer "control"].)
By reason of a 2001 amendment, Wage Order No. 4 applies to employees of the state government, but only in part. Before the 2001 amendment, former section 1(B) of the wage order stated: "The provisions of this Order shall not apply to employees directly employed by the State...." (IWC wage order No. 4-2000, § 1(B).) As a result of the 2001 amendment, section 1(B) now states: "Except as provided in Sections 1, 2, 4, 10, and 20, the provisions of this order shall not apply to any employees directly employed by the State...." (Wage Order No. 4, § 1(B), italics added.) Thus, only sections 1, 2, 4, 10, and 20 of Wage Order No. 4 govern state employment.[3] (See Sheppard v. North Orange County Regional Occupational Program (2010) 191 Cal.App.4th 289, 300-301 [120 Cal.Rptr.3d 442] (Sheppard).) The sections that are most relevant here are section 2, which is the "Definitions" section (and which includes the definition of "`[h]ours worked'"), and section 4, which is the "Minimum Wages" section. Significantly, section 3—which is the section of Wage Order No. 4 that guarantees overtime pay—is not among the excepted sections listed in the opening clause of section 1(B) of the wage order, and therefore section 3's overtime guarantee is not applicable to state government employees.
In summary, Wage Order No. 4's "Definitions" and "Minimum Wages" sections expressly apply to rank-and-file employees of the state government, and Morillion, supra, 22 Cal.4th 575, supports an argument that both types of walk time at issue in this case fall within Wage Order No. 4's definition of "`[h]ours worked,'" a definition that focuses on "control."
2. The Pay Scale Manual
"Under the California Constitution it is the Legislature, rather than the Governor, that generally possesses the ultimate authority to establish or revise the terms and conditions of state employment through legislative enactments, and ... any authority that the Governor or an executive branch entity ... is entitled to exercise in this area emanates from the Legislature's delegation of a portion of its legislative authority to such executive officials or entities through statutory enactments." (Professional Engineers in California Government v. Schwarzenegger (2010) 50 Cal.4th 989, 1015 [116 Cal.Rptr.3d 480, 239 P.3d 1186] (Professional Engineers), second italics added; see Pacific Legal Foundation v. Brown (1981) 29 Cal.3d 168, 188 [172 Cal.Rptr. 487, 624 P.2d 1215].) The Legislature has delegated to CalHR express authority to adopt regulations governing the terms and conditions of state employment, including setting the salaries of state workers (Gov. Code, § 19826) and defining their overtime (id., §§ 19843, 19844, 19845, 19849). Under this delegated legislative authority, CalHR has adopted the Pay Scale Manual, setting forth salary ranges for thousands of job classifications and establishing "work week groups" for purposes of regulating overtime. (See CalHR, California State Civil Service Pay Scales—Online Manual (54th Edition) (2019) [as of June 27, 2019] (the Pay Scale Manual, or the Manual).)[4]
The wages and hours of workers in California, including state government workers, are also governed by federal law, specifically, the FLSA (29 U.S.C. § 201 et seq.).[5] The FLSA imposes a federal minimum wage (id., § 206) and overtime compensation requirement (id., § 207). It generally defines overtime as "a workweek longer than forty hours," and it requires payment "at a rate not less than one and one-half times the regular rate" for such work. (Id., § 207(a)(1).) But the FLSA includes several exemptions from its overtime requirement, including one for the employment, by a public agency, of fire suppression or law enforcement personnel (Gov. Code, § 207(k) (section 7(k))).
The latter exemption is sometimes referred to as the "section 7(k) exemption" because it appears in section 7(k) of the FLSA, a provision that is codified as section 207(k) of title 29 of the United States Code. In the case of law enforcement personnel (a category that includes correctional employees), the section 7(k) exemption requires that the employee receive overtime compensation "at a rate not less than one and one-half times the regular rate" for any work in excess of 171 hours in a work period of 28 consecutive days (or a proportionately lesser number of hours in a shorter work period). (29 U.S.C. § 207(k)(1)(B); 29 C.F.R. § 553.230(b) (2018); see Fire Protection and Law Enforcement Employees of Public Agencies; Study of Average Number of Hours Worked, 48 Fed.Reg. 40518-40519 (Sept. 8, 1983) [describing how the 171-hour limit was determined].)
As already noted, employees of the state government are not subject to Wage Order No. 4's overtime compensation section. (Wage Order No. 4, § 1(B).) Instead, CalHR has authority to define overtime compensation for state government employees (Gov. Code, §§ 19843, 19844, 19845, 19849), and more particularly, CalHR "is authorized to provide for overtime payments as prescribed by the [FLSA]" (id., § 19845, subd. (a), italics added). Pursuant to that authority, Section 10 of the Pay Scale Manual refers to "WORK WEEK GROUPS ESTABLISHED UNDER FAIR LABOR STANDARDS ACT (FLSA)," and directly under that heading, the Manual establishes "Work Week Group 2." Under the subheading "Determination of Coverage under FLSA," the Manual provides that "[t]he provisions of Work Week Group 2 are made applicable to all [employment] classes which are determined by the Director of [CalHR] to include positions subject to the FLSA." (Italics added.) All the job classifications that are at issue in this litigation—both those of the represented plaintiffs and those of the unrepresented plaintiffs—are assigned to Work Week Group 2.[6]
These same provisions of Section 10 of the Pay Scale Manual also incorporate the FLSA's definition of compensable worktime, stating that "[f]or the purpose of identifying hours worked under the provisions of the FLSA, only the time spent which is controlled or required by the State and pursued for the benefit of the State need be counted." (Italics added.) This definition, which expressly references the FLSA, is drawn nearly verbatim from the high court's decision in Tennessee Coal Co. v. Muscoda Local. (1944) 321 U.S. 590 [88 L.Ed. 949, 64 S.Ct. 698] (Tennessee Coal), which defines FLSA-regulated work as "physical or mental exertion (whether burdensome or not) controlled or required by the employer and pursued necessarily and primarily for the benefit of the employer and his business." (Tennessee Coal, at p. 598, italics added.) Thus, it is clear that the Pay Scale Manual intends the FLSA's definition of compensable worktime to apply.[7]
The Pay Scale Manual's definition of compensable worktime—like that of Wage Order No. 4—uses the word "control[]." Nonetheless, the two definitions differ on a point that is critical to the parties' dispute. The Pay Scale Manual's definition is expressly based on the FLSA definition, and the FLSA, by its terms, excludes entry-exit walk time from coverage. That exclusion is a result of Congress's enactment, in 1947, of the Portal-to-Portal Act (29 U.S.C. § 252 et seq.). The Portal-to-Portal Act states that, except when a contract or custom provides otherwise, "no employer shall be subject to any liability or punishment under the Fair Labor Standards Act of 1938 ... on account of the failure of such employer to pay an employee minimum wages, or to pay an employee overtime compensation, for or on account of any of the following activities of such employee ... (1) walking, riding, or traveling to and from the actual place of performance of the principal activity or activities which such employee is employed to perform, and(2) activities which are preliminary to or postliminary to said principal activity or activities, which occur either prior to the time on any particular workday at which such employee commences, or subsequent to the time on any particular workday at which he ceases, such principal activity or activities...." (Id., § 254(a), italics added.) The parties refer to this FLSA definition of compensable worktime as the "first principal activity standard."
Plaintiffs' petition for review does not argue that entry-exit walk time is compensable under the constraints the Portal-to-Portal Act placed on the FLSA; rather, it argues that the FLSA definition of compensable worktime does not apply. Therefore, we proceed under the assumption that under federal law, entry-exit walk time is not compensable. (See Integrity Staffing Solutions, Inc. v. Busk (2014) 574 U.S. 27, ___ [190 L.Ed.2d 410, 135 S.Ct. 513, 519] ["We hold that an activity is integral and indispensable to the principal activities that an employee is employed to perform—and thus compensable under the FLSA—if it is an intrinsic element of those activities and one with which the employee cannot dispense if he is to perform his principal activities. Because the employees' time spent waiting to undergo and undergoing [the employer's] security screenings [when leaving work each day] does not meet these criteria, we reverse the judgment of the Court of Appeals." (italics added)].)
In summary, this case involves a conflict between two regulatory schemes. Wage Order No. 4 regulates the minimum wage the state government must pay its rank-and-file employees, and it defines compensable worktime in a broad way that arguably includes both types of walk time at issue in this litigation. (See Morillion, supra, 22 Cal.4th at pp. 587-588.) At the same time, the Pay Scale Manual sets forth the regular and overtime compensation that the state government must pay to certain classes of its employees (including plaintiffs' classes), and in so doing, it expressly adopts the FLSA's narrower definition of compensable worktime, a definition that, by its terms, excludes entry-exit walk time.
C. The Trial
As noted, the parties stipulated that the trial could proceed in multiple phases. In the first phase, several threshold questions that were potentially dispositive of plaintiffs' claims were tried to the court. These questions included: (1) whether plaintiffs' compensable worktime was properly determined according to the "control standard" (i.e., the standard that applies under the state's wage orders) or according to the "first principal activity ... standard" (i.e., the standard that applies under the constraints the Portal-to-Portal Act placed on the FLSA), and also whether the represented plaintiffs agreed to application of the narrower federal standard; (2) whether the duty to pay plaintiffs the minimum wage was properly determined by California minimum wage law (including Wage Order No. 4's broad definition of compensable worktime) or by federal minimum wage law (including the FLSA's narrower definition of compensable worktime), and also whether the represented plaintiffs agreed to the application of federal minimum wage law and whether any such agreement is enforceable; and (3) whether an employee of the state can bring a common law breach of contract claim against the state for failure to pay overtime compensation that has been earned, and if so, what contractually enforceable overtime policies existed.
The evidence at the first phase of the trial established the following facts.
1. The Represented Plaintiffs
The represented plaintiffs are members of State Bargaining Unit 6, which covers state correctional employees, and they are represented by the California Correctional Peace Officers Association (CCPOA). The CCPOA and the state have negotiated several memoranda of understanding (MOUs), but the MOU in effect from July 1, 1998, to June 30, 1999 (the 1998-1999 MOU), was the first to include a section 7(k) schedule. Specifically, the 1998-1999 MOU contained a section entitled "7k Exemption," which provided for a work schedule of 168 hours in a recurring 28-day work period.
The "7k Exemption" section of the 1998-1999 MOU began with an express reference to the FLSA: "CCPOA and the State agree that the [represented plaintiffs] are working under the provisions of Section []7k of the Fair Labor Standards Act (FLSA) and the parties acknowledge that the employer is declaring a specific exemption for these employees under the provisions specified herein." The 1998-1999 MOU then set forth the 168-hour work schedule, and it defined overtime as time worked in excess of that schedule. The 168 hours consisted of 160 hours of "on post" duty, four hours of "pre and post work activities," and four hours of "training." Regarding the four hours of "pre and post work activities," the 1998-1999 MOU stated: "CCPOA agrees that generally this is sufficient time for all pre and post work activities during each work period, and that the compensation allotted for these activities under this provision is full compensation for all of these activities."[8] The 1998-1999 MOU further stated: "The State and CCPOA agree that they have made a good faith attempt to comply with all requirements of the FLSA in negotiating this provision."
Significantly, the phrase "pre and post work activities" as used in the 1998-1999 MOU referred to duty-integrated walk time, not entry-exit walk time. According to testimony from David Gilb, the state's chief negotiator, the state took the position during negotiations that the phrase encompassed activities that occurred before correctional employees arrived at their assigned work posts and after they left those posts, but the phrase only encompassed activities that began when an employee first picked up his or her equipment in the central control area of the prison facility and that ended when an employee dropped off the same equipment at the end of his or her shift. According to Gilb, the phrase "pre and post work activities" did not include time spent between entering the outermost gate of a prison facility and first picking up equipment, or time spent leaving a facility after dropping off equipment. The union initially sought compensation for such time, but the state argued that entry-exit walk time was not compensable because the parties were negotiating under the FLSA's section 7(k) exemption, and the FLSA—as amended by the Portal-to-Portal Act—did not require such compensation. Rather, asserted the state, compensable worktime under the FLSA begins with the "first principal activity" that an employee is employed to perform. The testimony of CCPOA's chief negotiator, Stephen Weiss, confirmed that the parties did not consider entry-exit walk time to be compensable. He testified that the phrase "pre and post work activities" was not specifically defined in the MOU, "[b]ut in the conversations at the [bargaining] table, it was picking up your keys, picking up your tools, Mace, whatever was appropriate for the particular post that they were working."
During the discussions that led to the 1998-1999 MOU there was no suggestion that state wage-and-hour protections applied. The reason CCPOA did not make that argument was that, at the time of the negotiations, the state statutes setting the minimum wage and permitting private actions to enforce the minimum wage (Lab. Code, §§ 1182.11, 1182.12, 1194, 1197) only applied to the extent a wage order applied (see Martinez, supra, 49 Cal.4th at pp. 56-57), and the wage order that might apply to correctional employees— Wage Order No. 4—expressly exempted employees of the state government from all its provisions. As mentioned, Wage Order No. 4 was revised in 2001, making a few of its sections, including its "Definitions" and "Minimum Wages" sections (but not its overtime section), applicable to state employees. (See Wage Order No. 4, § 1(B); see also Sheppard, supra, 191 Cal.App.4th at pp. 300-301.)
The Legislature approved the 1998-1999 MOU, and this approval was signed by the Governor and chaptered into law. (Stats. 1998, ch. 820, § 2, p. 5135.) The next MOU, which was in effect between the parties from July 1, 1999, to July 2, 2001, continued the relevant provisions of the 1998-1999 MOU, and like its predecessor, it too was approved by the Legislature by way of a regularly enacted law. (Stats. 1999, ch. 778, § 6, subd. (b), p. 5613.) The MOU in effect from July 1, 2001, to July 2, 2006 (the 2001-2006 MOU), provided for a schedule of only 164 hours in a 28-day work period, with this shorter schedule going into effect on July 1, 2004. The shorter schedule was achieved by eliminating the four hours allocated to training in the previous MOUs. As with the previous MOUs, four hours remained allocated to "pre and post work activities," and the 2001-2006 MOU included the language from the previous MOUs, stating that those four hours were "sufficient time for all pre and post work activities during each work period" and "that the compensation allotted for these activities under this provision is full compensation for all of these activities." The 2001-2006 MOU also included the language from the previous MOUs, stating that the parties had made a good faith attempt to comply with the FLSA. Like its predecessors, the 2001-2006 MOU was approved by the Legislature, and this approval was signed by the Governor and chaptered into law. (Stats. 2002, ch. 1, § 2, p. 3.)
From July 2, 2006, to September 18, 2007, the parties negotiated unsuccessfully for a new MOU, and during that time, CCPOA and the state continued to give effect to the provisions of the 2001-2006 MOU. (See Gov. Code, § 3517.8, subd. (a) [authorizing employment under the terms of an expired MOU while negotiations are ongoing].) On September 18, 2007, the parties reached an impasse in their negotiations, and the state implemented the terms of its "last, best, and final offer." (See id., § 3517.8, subd. (b).) Except by way of budget acts authorizing the expenditure of state funds, the terms of the state's "last, best, and final offer" were not approved by the Legislature. As regards the section 7(k) schedule, however, the "last, best, and final offer" was not different from the 2001-2006 MOU.
In late 2007, the national economy went into recession, and a steep drop in state revenues seriously impacted the state's budget. (See Professional Engineers, supra, 50 Cal.4th at pp. 1000-1008 [describing state's fiscal crisis, which began in late 2007 and continued for several years thereafter].) The state and CCPOA next entered into an MOU on May 16, 2011 (the 2011-2013 MOU). This new MOU, like its predecessors, invoked section 7(k) of the FLSA, and it continued the schedule of 164 hours in a recurring 28-day work period, a schedule that expressly included four hours for "pre and post work activities." But, by the time of the 2011-2013 MOU, the present litigation had begun. Therefore, the 2011-2013 MOU did not include the language found in the earlier MOUs, stating that four hours constituted sufficient compensation for pre- and postwork activities. The MOU stated in a side letter that "nothing in this MOU shall have prejudicial effect to either side's arguments in Stoetzl v. State of California" (referring to the present litigation). The 2011-2013 MOU, like its predecessors, was approved by the Legislature, and this approval was signed by the Governor and chaptered into law. (Stats. 2011, ch. 25, § 2.)
2. The Unrepresented Plaintiffs
Labor relations between the state and the unrepresented plaintiffs are governed by, among other things, the Bill of Rights for State Excluded Employees (Gov. Code, § 3525 et seq.), which imposes "meet and confer" obligations on the state (id., § 3533), but which does not provide for collective bargaining through an exclusive employee representative (id., §§ 3530, 3531). Therefore, no MOU governs the wages and hours of the unrepresented plaintiffs. Instead, CalHR, pursuant to its delegated legislative authority to set wages and hours for state workers (id., §§ 19826, 19843, 19844, 19845, 19849), has adopted the Pay Scale Manual. As discussed, state law expressly permits CalHR "to provide for overtime payments as prescribed by the [FLSA]" (Gov. Code, § 19845, subd. (a)), and Section 10 of the Pay Scale Manual does so for specified job classifications—including all the job classifications that are the subject of this litigation—by creating "Work Week Group 2" under the heading "WORK WEEK GROUPS ESTABLISHED UNDER FAIR LABOR STANDARDS ACT (FLSA)."
Section 10 of the Pay Scale Manual divides Work Week Group 2 into three categories: (1) "employees in classes not eligible for exemption under Section 7K of the FLSA"; (2) "employees in law enforcement classes, for which exemption under Section 7K of the FLSA is claimed"; and (3) "employees in fire suppression classes, for which exemption under Section 7K of the FLSA is claimed." As to each of these categories, the Pay Scale Manual adopts work schedules that derive directly from the FLSA (see 29 U.S.C. § 207(a)(1); 29 C.F.R. § 553.230 (2018)), thus confirming the intent of CalHR to adopt FLSA standards for Work Week Group 2. The job classifications of the unrepresented plaintiffs all fall within the first of the three Work Week Group 2 categories. Therefore, although their job classifications are included in Work Week Group 2, the unrepresented plaintiffs are not eligible for the FLSA's section 7(k) exemption. Rather, for them, the Pay Scale Manual defines overtime "as all hours worked in excess of 40 hours in a period of 168 hours or seven consecutive 24-hour periods," which, of course, is how the FLSA defines overtime when no special exemption is invoked (see 29 U.S.C. § 207(a)(1)).
D. The Trial Court's Ruling
The gist of plaintiffs' claims is that the state did not adequately compensate them for walk time. The trial court rejected that assertion, ruling in favor of the defendants on all issues.
As to the represented plaintiffs, the trial court concluded that the "first principal activity" standard that defines compensable worktime for purposes of the FLSA governs plaintiffs' claims. The trial court based its conclusion on the language of the MOUs (which incorporated the FLSA's section 7(k) schedule), testimonial evidence that the parties agreed, during negotiations, to adopt the FLSA's "first principal activity" standard, and the fact that the MOUs were approved by the Legislature, thus superseding conflicting laws of more general application.
As to the unrepresented plaintiffs, the trial court concluded that, by assigning various job classifications to Work Week Group 2, CalHR had determined that those job classifications should be governed by the FLSA, and more specifically by the "first principal activity" standard that defines compensable worktime for purposes of the FLSA. The trial court further concluded that, in doing so, CalHR acted within its express delegated authority under Government Code section 19845, subdivision (a). The trial court rejected plaintiff's argument that, by using the word "control[]" in the Pay Scale Manual's definition of compensable worktime applicable to Work Week Group 2, CalHR had indicated its intent to incorporate the "control" standard that is used to define compensable worktime under the state's wage orders. On the contrary, concluded the trial court, CalHR took the word "control[]" directly from the definition of compensable worktime that applies under the FLSA (see Tennessee Coal, supra, 321 U.S. at p. 598), and therefore the word must be read in light of, and consistent with, the "first principal activity" standard.
In the trial court's view, the foregoing conclusions disposed of plaintiffs' minimum wage cause of action, which was based on the assertion that the "control" standard of the state's wage orders, not the "first principal activity" standard of the FLSA, defined compensable worktime for purposes of the duty to pay the minimum wage. The trial court reasoned that by approving the MOUs (in the case of the represented plaintiffs) and by authorizing CalHR to establish work week groups that were subject to the FLSA's overtime standards (in the case of the unrepresented plaintiffs), the Legislature enacted specific laws that superseded the state's more general minimum wage laws.
As to plaintiffs' overtime claims based on common law breach of contract, the trial court ruled that plaintiffs' claims were subject to the rule that the terms and conditions of public employment are controlled by statute and ordinance, not by contract, and that plaintiffs had not established the existence of a contractual agreement to pay overtime compensation other than as provided in the MOUs.
Based on the foregoing conclusions, which disposed of all of plaintiffs' remaining claims, the trial court declined to reach defendants' contentions that plaintiffs had failed to exhaust administrative remedies and had failed to comply with the government claims statutes (Gov. Code, § 900 et seq.).
E. The Court of Appeal Decision
The Court of Appeal affirmed the trial court as to the represented plaintiffs, but it reversed the trial court as to the unrepresented plaintiffs.
As to the represented plaintiffs, the Court of Appeal reasoned that the Legislature's approval of the MOUs, and the Governor's signature, effectively made those agreements into laws that, because of their specificity, superseded any conflicting general laws that might otherwise apply. (Stoetzl v. State of California (2017) 14 Cal.App.5th 1256, 1272 [222 Cal.Rptr.3d 728], review granted Nov. 29, 2017, S244751 (Stoetzl).) The MOUs expressly stated that the represented plaintiffs were working under the "7K Exemption" of the FLSA, and they also made express provision for duty-integrated walk time, allotting an aggregate of four compensable hours to such walk time in each recurring 28-day work period. (Stoetzl, at p. 1273.) In addition, in negotiating the 1998-1999 MOU, both the parties understood that they were proceeding under the FLSA (Stoetzl, at p. 1273), and they further understood that the state did not consider entry-exit walk time to be compensable under the FLSA (Stoetzl, at p. 1273). The text of all the MOUs reflected those understandings, thus carrying forward the negotiating history of the 1998-1999 MOU, and the Legislature's approval of the MOUs gave those understandings the status of law. Therefore, in the Court of Appeal's view, the trial court had properly concluded that the FLSA governed the represented plaintiffs' right to compensation. (Stoetzl, at p. 1273.) That conclusion disposed of the represented plaintiffs' minimum wage cause of action (ibid.), their overtime compensation cause of action based on breach of contract (id. at pp. 1278-1279), and their overtime compensation cause of action based on Labor Code sections 222 and 223 (Stoetzl, at p. 1279).
As to the unrepresented plaintiffs, the Court of Appeal concluded that their minimum wage claims should be allowed to proceed. (Stoetzl, supra, 14 Cal.App.5th at p. 1276, review granted.) The court reasoned that it needed to harmonize the requirements of Wage Order No. 4, whose definition of compensable worktime expressly applies to rank-and-file employees of the state government, with CalHR's Pay Scale Manual, which likewise defines compensable worktime for specified classes of state government employees, including plaintiffs' classes. (Stoetzl, at p. 1275.) The Court of Appeal noted, in this regard, that the Pay Scale Manual is not a legislative enactment, whereas the wage orders "have `the same dignity as statutes.'" (Ibid.) The Court of Appeal further noted that the Manual's definition of compensable worktime uses the word "control[]," which, in the court's view, suggested a parallel to the "control" standard that applies under the state's wage orders. (Stoetzl, at pp. 1275-1276.) Moreover, the Court of Appeal noted that the Manual's definition of compensable worktime, although drawn nearly verbatim from FLSA definition, does not expressly exclude entry-exit walk time. (Stoetzl, at p. 1276.) Finally, the Court of Appeal noted that the Pay Scale Manual does not contain an express provision stating that Wage Order No. 4 does not apply, whereas Wage Order No. 4 expressly states that its "Definitions" and "Minimum Wages" sections apply to state government employees. (Stoetzl, at p. 1276.)
Therefore, the Court of Appeal concluded that Wage Order No. 4's broad definition of compensable worktime governed the state's obligation to pay the minimum wage to the unrepresented plaintiffs. The court said: "We may reasonably construe the regulatory schemes to mean that entitlement to overtime compensation is controlled by the FLSA but that the meaning of `hours worked' is governed by Wage Order 4. Such a construction does violence to neither regulatory scheme. Accordingly, we conclude the unrepresented employees are entitled to [minimum wage] pay for all hours worked under the applicable California standard rather than the FLSA's standard." (Stoetzl, supra, 14 Cal.App.5th at p. 1276, review granted.)
As to the breach of contract claims of the unrepresented plaintiffs—claims that sought overtime compensation for walk time—the Court of Appeal concluded that those claims, too, should be allowed to proceed because the unrepresented plaintiffs "are entitled to compensation for all hours worked under California's broader standard." (Stoetzl, supra, 14 Cal.App.5th at p. 1279, review granted.) The Court of Appeal held, however, that the trial court properly rejected the unrepresented plaintiffs' Labor Code section 222 cause of action, because that statute only applies where there is a collective bargaining agreement in force between the parties. (Stoetzl, at pp. 1279-1280.) Likewise, it properly rejected their Labor Code section 223 cause of action, because that statute is concerned with secret deductions and kick-backs, an issue not presented by the allegations of plaintiffs' operative complaints. (Stoetzl, at pp. 1280-1281.)
Both sides petitioned for review, and we granted both petitions.
II. DISCUSSION
Plaintiffs seek additional compensation for walk time, basing their claims on three legal theories set forth in three causes of action: (1) failure to pay the minimum wage in violation of state minimum wage laws; (2) failure to pay overtime compensation in breach of common law contractual obligations; and (3) failure to pay overtime compensation in violation of Labor Code sections 222 and 223.[9] We address each of these causes of action in turn.
A. The Minimum Wage Cause of Action
1. The Represented Plaintiffs
We agree with the trial court and the Court of Appeal that the represented plaintiffs agreed, through the collective bargaining process, to receive a specific amount of compensation for walk time, and the state's minimum wage laws do not entitle them to additional compensation.
Since enactment of the Ralph C. Dills Act in 1977 (the Dills Act) (Gov. Code, § 3512 et seq.), state government employees have had the right to be represented by a union and to bargain collectively over the wages, hours, and terms of employment. (Gov. Code, §§ 3512, 3515, 3515.5, 3516, 3517.)[10] The Director of CalHR represents the Governor in these negotiations (Gov. Code, §§ 19815, subd. (b), 19815.4, subd. (g)), and once a union and the director have reached agreement, they are required to prepare an MOU memorializing the terms of that agreement (id., § 3517.5). Significantly, "the Dills Act is a `"supersession statute"' [citation], meaning that when a provision of an MOU conflicts with an otherwise applicable statutory provision governing the terms and conditions of employment, the provision of the MOU generally `supersedes' or prevails over the terms of the otherwise applicable statute, without any need for further legislative approval of the conflicting MOU provision. [Citation.]" (Professional Engineers, supra, 50 Cal.4th at p. 1018.) Statutory provisions that are automatically superseded by an MOU are listed in Government Code sections 3517.6 and 3517.61. If, however, an MOU requires the expenditure of state funds or if its implementation requires amendment of statutory provisions that are not among those listed in Government Code sections 3517.6 and 3517.61, it must be approved by the Legislature. (Gov. Code, §§ 3517.5, 3517.6, subd. (b), 3517.61.)
The represented plaintiffs agreed through the foregoing collective bargaining process to a specific amount of compensation for duty-integrated walk time. Specifically, they agreed to four hours' pay for "pre and post work activities" in a recurring 28-day work period, and the record supports the trial court's finding that the phrase "pre and post work activities" was used by the parties to refer to duty-integrated walk time.[11]
Moreover, CCPOA expressly conceded in the text of three of the four MOUs at issue here "that generally [four hours] is sufficient time for all pre and post work activities during each work period, and that the compensation allotted for these activities under this provision is full compensation for all of these activities." Significantly, the trial court made a finding that the word "generally" was included in the foregoing stipulation because the state wanted to allow employees to apply for additional compensation when such compensation was necessary due to the dynamic environment of the prison. This factual finding, too, is amply supported by testimony at trial,[12] and therefore it is not subject to being reconsidered by us on review. (See People ex rel. Dept. of Corporations v. SpeeDee Oil Change Systems, Inc. (1999) 20 Cal.4th 1135, 1143 [86 Cal.Rptr.2d 816, 980 P.2d 371] ["If the trial court resolved disputed factual issues, the reviewing court should not substitute its judgment for the trial court's express or implied findings supported by substantial evidence."]; see also Gaines v. Fidelity National Title Ins. Co. (2016) 62 Cal.4th 1081, 1100 [199 Cal.Rptr.3d 137, 365 P.3d 904]; Haraguchi v. Superior Court (2008) 43 Cal.4th 706, 711 [76 Cal.Rptr.3d 250, 182 P.3d 579]; Professional Engineers in California Government v. Kempton (2007) 40 Cal.4th 1016, 1032 [56 Cal.Rptr.3d 814, 155 P.3d 226].) Accordingly, the word "generally" cannot be read to suggest that in some work periods duty-integrated walk time consumed more than four hours and the represented plaintiffs worked without compensation. Rather, the parties expressly agreed that four hours in 28 days was ordinarily enough time to complete the activities associated with duty-integrated walk time and that when more time was necessary, an employee could apply for it.
Although CCPOA did not make this same concession in the 2011-2013 MOU, the parties agreed in a side letter that "nothing in this [2011-2013] MOU shall have prejudicial effect to either side's arguments in Stoetzl v. State of California," referring to the present litigation. Therefore, the omission of language that had been included in all the previous MOUs, stating that four hours was generally sufficient for pre- and postwork activities, cannot be construed as an indication that four hours had somehow ceased to be sufficient, at least under ordinary circumstances. In addition, there is no allegation that the represented plaintiffs were barred from applying for additional compensation if such compensation became necessary due to the "dynamic environment" of the prison. As noted, the trial court found that the state permitted employees to apply for such additional compensation. Therefore, the represented plaintiffs cannot, as a factual matter, show that duty-integrated walk time ever went uncompensated.
The represented plaintiffs also agreed through the collective bargaining process to forgo compensation for entry-exit walk time. Each of the MOUs included a heading that read "Entire Agreement," followed by a provision that stated: "This [MOU] sets forth the full and entire understanding of the parties regarding the matters contained herein ...." Compensation was certainly one of the "matters contained" (i.e., provided for) in each of the MOUs. In fact, the preamble of each of the MOUs stated: "This AGREEMENT... has as its purpose ... the establishment of rates of pay, hours of work, and other terms and conditions of employment." (Italics added.) Therefore, pursuant to the integration clauses, the MOUs "set[] forth the full and entire understanding of the parties regarding" compensation, precluding any forms of compensation not addressed in the MOUs. More to the point, each of the MOUs made specific provision for compensating pre- and postwork activities, providing four hours' pay for such activities in a recurring 28-day work period. Because the MOUs "set[] forth the full and entire understanding of the parties regarding the matters contained [t]herein," and because compensation for preand postwork activities was one of the "matters contained" in each of the MOUs, the MOUs precluded compensation for entry-exit walk time by not making any provision for it.[13]
Moreover, the MOUs were all approved by the Legislature, with this approval signed by the Governor and chaptered into law. Thus, the MOUs became legislative enactments that because of their specificity, supersede the more general state laws on which the represented plaintiffs base their claims. (See, e.g., Lopez v. Sony Electronics, Inc. (2018) 5 Cal.5th 627, 634 [234 Cal.Rptr.3d 856, 420 P.3d 767] [in the event of a conflict, specific provisions ordinarily prevail over general ones].) It would be unfair to allow the represented plaintiffs, who negotiated a favorable deal at the bargaining table and who agreed to certain concessions as part of that deal, including concessions concerning compensation for walk time, to avoid those concessions after the Legislature passed a series of special laws approving their agreement.
This is not a case in which a party to a labor agreement agreed to waive state law protections that are not subject to waiver. (Cf. Gentry v. Superior Court (2007) 42 Cal.4th 443, 455 [64 Cal.Rptr.3d 773, 165 P.3d 556] ["By its terms, the rights to the legal minimum wage and legal overtime compensation conferred by the statute are unwaivable."]; Hoover v. American Income Life Ins. Co. (2012) 206 Cal.App.4th 1193, 1208 [142 Cal.Rptr.3d 312] ["[T]he rights accorded by [Labor Code] section[] ... 1194 ... may not be subject to negotiation or waiver."]; Grier v. Alameda-Contra Costa Transit Dist. (1976) 55 Cal.App.3d 325, 335 [127 Cal.Rptr. 525] ["[F]ull payment of accrued wages is an important state policy, enacted for protection of employees generally. As such, it is not to be avoided by the terms of a private agreement."].) Rather, this is a case in which a party to a labor agreement agreed, subject to legislative approval, to certain specified terms of employment, and the Legislature then enacted a special law approving the agreed-upon terms. Having expressly agreed to specific terms of compensation for pre- and postwork activities, and having declared those terms to be the "entire agreement" of the parties concerning compensation for such activities, and, most important, having received legislative approval of the agreement, the represented plaintiffs cannot credibly argue that they should now be released from the terms of the agreement and granted additional compensation based on the general laws of the state.
Of course, there was no special law approving the terms of defendants' "last, best, and final offer" (see Gov. Code, § 3517.8, subd. (b)), which was in effect between the parties from September 18, 2007, until May 16, 2011. During that time period, the Legislature fully funded the state's obligation under the last, best, and final offer, but it did not otherwise approve that offer, as it did the MOUs. The represented plaintiffs argue, on that account, that their claims for additional minimum wage compensation should prevail at least as to the 44-month period from September 18, 2007, until May 16, 2011.
Plaintiffs, however, misread the law that applies to a last, best, and final offer. As noted, the Dills Act requires that an MOU be presented to the Legislature for approval if it requires the expenditure of state funds or if its implementation requires the amendment of statutory provisions that are not among those provisions that the MOU automatically supersedes. In Department of Personnel Administration v. Superior Court (Greene) (1992) 5 Cal.App.4th 155 [6 Cal.Rptr.2d 714] (Greene), the Court of Appeal considered whether, in the context of the state's 1991-1992 fiscal crisis, CalHR's predecessor could, after bargaining to an impasse, unilaterally impose its last, best, and final offer regarding wages and health care contributions. (Id. at pp. 162-164.) The court held that when an MOU expires, its supersession of conflicting state laws comes to an end, and therefore those state laws come back into full effect. (Id. at p. 176.) Accordingly, the court concluded that the state was not permitted to implement its last, best, and final offer insofar as that offer included terms that conflicted with formerly superseded state laws. (Id. at pp. 172, 174, 185.)
The holding of Greene, supra, 5 Cal.App.4th 155, created problems for state employees because the expired MOU often offered greater employee protections than the general state laws that came back into full effect upon the MOU's expiration. Of particular concern to state employee unions was the continuing ability to collect fair share fees[14] and to rely on arbitration to resolve disputes. The CCPOA therefore sponsored legislation to set aside the holding of Greene. (See, e.g., Sen. Rules Com., Off. of Sen. Floor Analyses, Analysis of Sen. Bill No. 683 (1999-2000 Reg. Sess.) as amended Aug. 30, 2000, pp. 2-4; Assem. Com. on Appropriations, Analysis of Sen. Bill No. 683 (1999-2000 Reg. Sess.) as amended Aug. 19, 1999, pp. 1-2; Sen. Rules Com., Off. of Sen. Floor Analyses, 3d reading analysis of Sen. Bill No. 683 (1999-2000 Reg. Sess.) as amended April 19, 1999, pp. 2-5.) That legislation added section 3517.8 to the Government Code—sometimes referred to as the "evergreen" law—addressing the situation where an MOU expires with no new MOU in place.
If, upon expiration of the MOU, negotiations over a new MOU are ongoing, subdivision (a) of Government Code section 3517.8 requires the parties to give effect to the terms of the expired MOU, including terms that supersede existing law, with no need for additional legislative action. Next, if the parties reach an impasse in their negotiations, subdivision (b) of Government Code section 3517.8 authorizes the state to implement the terms of its last, best, and final offer. In the latter case, however, "[a]ny proposal in the state employer's last, best, and final offer that, if implemented, would conflict with existing statutes or require the expenditure of funds shall be presented to the Legislature for approval and, if approved, shall be controlling without further legislative action ...." (Gov. Code, § 3517.8, subd. (b), italics added.)
The represented plaintiffs argue that here, because the state's last, best, and final offer was not approved by the Legislature, there was no supersession of conflicting state laws, and therefore their claims for additional minimum wage compensation should prevail at least as to the 44-month impasse period in which no MOU was in place. What plaintiffs overlook is that the legislative approval required by Government Code sections 3517.6, subdivision (b), 3517.61, and 3517.8, subdivision (b) can, at least in some circumstances, be satisfied by a budget act authorizing the expenditure of state funds. As we explained in Professional Engineers, "[u]nder the Dills Act, it is clear that an MOU, once approved by the Legislature (either directly—see [Gov. Code], § 3517.5—or through the appropriation of sufficient funds to pay the agreed-upon employee compensation), governs the wages and hours of the state employees covered by the MOU." (Professional Engineers, supra, 50 Cal.4th at p. 1040, italics added; see id. at p. 1043 ["the Legislature retain[s] its ultimate control (through the budget process) over expenditures of state funds required by the provisions of an MOU" (italics added)]; ibid. ["by enacting appropriations for employee compensation in the [budget act] ..., the Legislature approved that level of compensation"].)
In fact, our opinion in Professional Engineers went even further, stating that the Legislature can use appropriations bills to modify the terms of state employment even while an MOU is in effect. Our decision in Professional Engineers arose in the context of the state fiscal crisis that began in late 2007 and continued for several years thereafter. (Professional Engineers, supra, 50 Cal.4th at pp. 1000-1008.) In December 2008, the Governor issued an executive order instructing the Department of Personnel Administration (now CalHR) to implement a mandatory two-day-a-month unpaid furlough of most executive branch employees. (Id. at p. 999.) In reviewing the legality of that mandatory furlough, we noted that when the Legislature revised the Budget Act of 2008, it reduced the relevant appropriation to a level that reflected the Governor's furlough plan. (Professional Engineers, at p. 1043.) We said: "By reducing the appropriation for employee compensation, the Legislature no longer had `fully funded' the provisions of the MOU's supporting the higher level of pay that previously had been approved, and thus ... the provisions of the applicable MOU's ... no longer were effective." (Ibid., italics added; see Service Employees Internat. Union, Local 1000 v. Brown (2011) 197 Cal.App.4th 252, 263 [128 Cal.Rptr.3d 711] ["Professional Engineers made it clear that it is the Legislature ... which has ... the final say ... in fixing the compensation paid to represented state employees, with that final say often being expressed in the budget process."].)
The holdings of Professional Engineers suffice to answer the represented plaintiffs' argument that there was no legislative approval here. (See also Brown v. Superior Court (2011) 199 Cal.App.4th 971, 998 [132 Cal.Rptr.3d 448] [appropriations bills satisfy legislative approval required by § 3517.8, subd. (b)].)[15] Because the last, best, and final offer that governed the represented plaintiffs' employment during the 44 months from September 18, 2007, until May 16, 2011, was funded by the Legislature, it was legislatively approved, and it therefore superseded conflicting state laws.
Accordingly, we agree with the trial court and the Court of Appeal that the represented plaintiffs are not entitled to additional minimum wage compensation for either duty-integrated walk time or entry-exit walk time. The MOUs made specific provision for duty-integrated walk time, and the trial court's findings of fact, which are supported by trial testimony, do not suggest that duty-integrated walk time ever went uncompensated. Although the MOUs did not specifically refer to entry-exit walk time, they expressly stated that they constituted the entire understanding of the parties regarding the matters they addressed, and compensation for pre- and postwork activities was one of those matters. Moreover, the Legislature's enactment of special laws approving the MOUs (and its decision to fund the state's last, best, and final offer) precludes the represented plaintiffs' reliance on more general state laws to support their minimum wage claims.
2. The Unrepresented Plaintiffs
As noted, the trial court concluded, as to the unrepresented plaintiffs, that the specific statutes authorizing CalHR to set the wages and hours of employees of the state government (see Gov. Code, §§ 19826, 19843, 19844, 19845, 19849)—and, in particular, to provide for overtime compensation as prescribed by the FLSA (see Gov. Code, § 19845, subd. (a))—superseded the more general statutes authorizing the IWC to regulate the wages and hours of public and private employees working in the state. The Court of Appeal rejected that conclusion, reasoning that CalHR intended to incorporate into its Pay Scale Manual the definition of compensable worktime that appears in Wage Order No. 4 and, therefore, that the wage order definition applied not only to plaintiffs' minimum wage claims but also to their overtime compensation claims based on breach of contract. We agree with the conclusion of the trial court and disagree with the conclusion of the Court of Appeal.
The Court of Appeal suggested that this case pitted an IWC wage order that has the "dignity" of statutory law against a provision of CalHR's Pay Scale Manual that does not. (See Stoetzl, supra, 14 Cal.App.5th at p. 1275, review granted.) That characterization is not completely accurate, however. Rather, we are confronted here with two competing statutory schemes, each broadly authorizing administrative action. It is true that the IWC's wage orders are entitled to extraordinary deference and that they must be harmonized, to the extent possible, with conflicting laws and regulations, but that harmonization does not mean that the wage orders must invariably prevail over the regulations of other agencies.
On the one hand, the Legislature empowered the IWC to regulate the wages and hours of employees generally. (Stats. 1913, ch. 324, § 6, pp. 634-635; Stats. 1972, ch. 1122, § 13, p. 2156; Stats. 1973, ch. 1007, § 8, p. 2004; see Martinez, supra, 49 Cal.4th at pp. 52-57 [describing the history of the IWC]; Industrial Welfare Com. v. Superior Court (California Hotel and Motel Association), supra, 27 Cal.3d 690, 700-701 [describing the expansion of the IWC's jurisdiction to cover all employees].) Pursuant to that authority, the IWC issued wage orders that, as relevant here, (1) define compensable worktime, (2) establish a minimum wage, (3) mandate overtime compensation, and (4) expressly apply the minimum wage section (but not the overtime section) to rank-and-file employees of the state government.
On the other hand, the Legislature empowered CalHR to set the wages and hours of employees of the state government (Gov. Code, §§ 19826, 19843, 19844, 19845, and 19849), including assigning various job classifications to work week groups for purposes of defining compensable worktime and regulating overtime compensation (id., § 19843, subd. (a)). Moreover, the Legislature expressly authorized CalHR to provide for overtime payments as prescribed by the FLSA. (Gov. Code, § 19845, subd. (a).) In California, the Legislature has ultimate responsibility for setting the terms and conditions of state employment, and therefore CalHR's authority in this area is unquestionably legislative, "emanat[ing] from the Legislature's delegation of ... its legislative authority." (Professional Engineers, supra, 50 Cal.4th at p. 1015.)
Given these two broad delegations of quasi-legislative authority, it is not obvious that, in the case of a direct conflict, the decisions of the IWC should invariably prevail over those of CalHR. The Court of Appeal reasoned that the IWC's wage orders "have `the same dignity as statutes,'" whereas "the Pay Scale Manual is not a legislative enactment" (Stoetzl, supra, 14 Cal.App.5th at p. 1275, review granted), but the underlying basis for treating the wage orders like statutes is the Legislature's broad delegation of legislative power to the IWC (see Martinez, supra, 49 Cal.4th at p. 61), and the Legislature's delegation of legislative power to CalHR is likewise very broad. We are not dealing here with an ambiguous statutory phrase or standard that CalHR must clarify, nor has the Legislature given CalHR much specific guidance as to what terms of employment it should adopt. Rather, we are dealing with a broad legislative gap—the terms of employment, including specific salary ranges, for thousands of state job classifications—and CalHR has filled that legislative gap, exercising its delegated legislative authority. Therefore, the provisions of the Pay Scale Manual at issue here are best characterized as quasi-legislative rules. (See Yamaha Corp. of America v. State Bd. of Equalization (1998) 19 Cal.4th 1, 10-11 [78 Cal.Rptr.2d 1, 960 P.2d 1031] [defining quasi-legislative rules as those that result from a delegation of legislative power, not those that merely represent the agency's view of a statute's meaning]; id. at p. 6, fn. 3 [noting that "the terms `quasi-legislative' and `interpretive' ... designate opposite ends of an administrative continuum, depending on the breadth of the authority delegated by the Legislature" (italics added)]; accord, Ramirez v. Yosemite Water Co. (1999) 20 Cal.4th 785, 798-799 [85 Cal.Rptr.2d 844, 978 P.2d 2]; see also American Mining Congress v. Mine Safety & Health Administration (D.C.Cir. 1993) 995 F.2d 1106, 1110 ["[T]he dividing line [between interpretive and quasi-legislative regulations] is the necessity for agency legislative action ...." "[A] rule supplying that action will be legislative ..., and an interpretation that spells out the scope of an agency's or regulated entity's pre-existing duty ... will be interpretive ...."].) As such, the provisions of the Pay Scale Manual, like the IWC's wage orders, "have the dignity of statutes." (Yamaha, at p. 10.)[16]
It is true that IWC wage orders must, when possible, be harmonized with statutes. (Brinker, supra, 53 Cal.4th at p. 1027.) It is also true that the Legislature's authority to delegate its legislative power to the IWC is expressly recognized in the state's Constitution. (Cal. Const., art. XIV, § 1.) But contrary to the conclusion of the Court of Appeal (Stoetzl, supra, 14 Cal.App.5th at p. 1275, review granted), neither of these points establishes that IWC wage orders prevail over the Pay Scale Manual. Despite the constitutional authorization, the IWC, in adopting and amending the wage orders, still only exercised authority delegated to it from the Legislature, as did CalHR in this area, so the IWC's wage orders and the Pay Scale Manual must be harmonized with statutes and with each other to the extent possible.
We also reject the Court of Appeal's suggestion that, by using the word "control[]," the Pay Scale Manual intended to incorporate Wage Order No. 4's broad definition of compensable worktime, a definition that also happens to use the word "control." (See Stoetzl, supra, 14 Cal.App.5th at pp. 1275-1276, review granted.) Rather, the Pay Scale Manual's definition of compensable worktime expressly incorporates the FLSA's definition. Government Code section 19845, subdivision (a) authorizes CalHR "to provide for overtime payments as prescribed by the [FLSA]." (Italics added.) CalHR exercised that authority in Section 10 of the Pay Scale Manual, which includes the heading "WORK WEEK GROUPS ESTABLISHED UNDER FAIR LABOR STANDARDS ACT (FLSA)," and which creates "Work Week Group 2" directly under that heading. Likewise, the provision of the Manual bearing the subheading "Determination of Coverage Under FLSA" states that "[t]he provisions of Work Week Group 2 are made applicable to all classes which are determined by the Director of [CalHR] to include positions subject to the FLSA" (italics added), and the three definitions of overtime that apply to job classifications in Work Week Group 2 precisely track the FLSA.[17] We are therefore confident about the intent of CalHR to adopt FLSA overtime standards for job classifications falling within Work Week Group 2.
More to the point, the definition of compensable worktime that appears in Section 10 of the Pay Scale Manual not only expressly references the FLSA, but it also tracks the language of the definition that applies under the FLSA. Specifically, the Pay Scale Manual states in relevant part: "For the purpose of identifying hours worked under the provisions of the FLSA, only the time spent which is controlled or required by the State and pursued for the benefit of the State need be counted." (Italics added.) By way of comparison, the interpretive bulletin of the United States Department of Labor, defining compensable worktime for purposes of the FLSA, states in relevant part: "[E]mployees subject to the act must be paid for all time ... `... controlled or required by the employer and pursued necessarily and primarily for the benefit of the employer and his business.' [Citation.]" (29 C.F.R. § 785.7 (2018), italics added, quoting Tennessee Coal, supra, 321 U.S. at p. 598.) Thus, contrary to the Court of Appeal's suggestion, the Pay Scale Manual clearly adopts the FLSA definition of compensable worktime; it does not adopt Wage Order No. 4's definition.
It is true that the Pay Scale Manual's definition, like that of Wage Order No. 4, uses the word "control[]." It is also true that, in Morillion, we focused on the word "control" in the wage order's definition of compensable worktime, making that word the basis of our decision. (See Morillion, supra, 22 Cal.4th at pp. 587-588 [holding that travel time is compensable under the wage orders because it was under the "control" of the employer].) But because the Pay Scale Manual's definition of compensable worktime expressly refers to the FLSA, and because its language tracks that of the FLSA definition almost verbatim (including the word "`control[]'" that appears in that definition) (29 C.F.R. § 785.7 (2018), quoting Tennessee Coal, supra, 321 U.S. at p. 598), there is no possibility that the Pay Scale Manual intended to incorporate the wage order definition and not the FLSA definition.
Moreover, the Pay Scale Manual's definition of compensable worktime includes, by implication, the limitation that the Portal-to-Portal Act placed on the FLSA. It is simply not credible that the Manual—which (1) uses the heading "WORK WEEK GROUPS ESTABLISHED UNDER FAIR LABOR STANDARDS ACT (FLSA)," (2) consistently and repeatedly incorporates FLSA standards in the provisions that fall under that heading, and (3) defines compensable worktime using language drawn almost verbatim from the FLSA definition—was intended by CalHR to exclude an important aspect of the FLSA definition and that it did so without mentioning that fact expressly. If CalHR had wanted to exclude the Portal-to-Portal Act's limiting provisions from the Pay Scale Manual's FLSA-based definition of compensable worktime, it certainly could have done so (see Morillion, supra, 22 Cal.4th at pp. 588-594; see also In Re: Amazon.com, Inc., Fulfillment Center Fair Labor Standards Act (FLSA) and Wage and Hour Litigation (6th Cir. 2018) 905 F.3d 387), but it would have needed to make that intention clear.
The Court of Appeal, however, strained the plain meaning of both the wage order and the Pay Scale Manual to hold that the latter incorporated the former's definition of compensable worktime. The court did so because it correctly saw the need to harmonize the two administrative schemes to the extent possible. We conclude, however, that Wage Order No. 4 and the Pay Scale Manual cannot be harmonized and that the Pay Scale Manual must be treated as a statutorily authorized exception to Wage Order No. 4.
As discussed, the IWC was given authority to adopt regulations governing wages, hours, and working conditions for "all employees"—private and public—in the state of California. (Lab. Code, § 1173; see id., § 1182; Martinez, supra, 49 Cal.4th at pp. 52-57.) Pursuant to that authority, the IWC amended Wage Order No. 4 in 2001 to apply that order's minimum wage provision to the state government's rank-and-file employees, and in so doing, it also applied the wage order's broad definition of compensable worktime to those employees. But at the time of that amendment (as now), Government Code section 19845, subdivision (a) already included an overlapping and much more specific authorization of administrative action. It provided: "Notwithstanding any other provision of this chapter, [CalHR] is authorized to provide for overtime payments as prescribed by the [FLSA] to state employees." (Id., § 19845, subd. (a).) Pursuant to the latter authority, CalHR had already, as of the time that the IWC amended Wage Order No. 4, included Work Week Group 2 in its Pay Scale Manual, and it had already provided that FLSA overtime standards—including the FLSA's narrow definition of compensable worktime—applied to state employees in that work week group. Therefore, the IWC's action in 2001 must be viewed as being taken subject to CalHR's more specific authority, and the latter must prevail to the extent of a conflict. (See State Dept. of Public Health v. Superior Court (Center for Investigative Reporting) (2015) 60 Cal.4th 940, 960 [184 Cal.Rptr.3d 60, 342 P.3d 1217] ["[T]he rule that specific provisions take precedence over more general ones trumps the rule that later-enacted statutes have precedence [over earlier ones]."]; People v. Gilbert (1969) 1 Cal.3d 475, 479 [82 Cal.Rptr. 724, 462 P.2d 580] ["`[W]here the general statute standing alone would include the same matter as the special act, and thus conflict with it, the special act will be considered as an exception to the general statute whether it was passed before or after such general enactment.'" (italics added)]; Code Civ. Proc., § 1859 ["[W]hen a general and particular provision are inconsistent, the latter is paramount to the former."].)[18]
In summary, the IWC was authorized to adopt general background rules governing employee wages and hours, but CalHR was the recipient of a more specific delegation, to establish salary ranges for state workers and to adopt, as appropriate, FLSA overtime standards for such workers. Regardless of which agency most recently exercised its delegated authority, to the extent CalHR's standards conflict with the more generally applicable wage order standards, they supersede them. It follows, therefore, that the Pay Scale Manual, including its narrow FLSA-based definition of compensable worktime, governs the right of the unrepresented plaintiffs to compensation and that they are not entitled to minimum wage compensation based on Wage Order No. 4's broader definition of compensable worktime.[19]
We conclude that the trial court was correct to reject the minimum wage claims of the unrepresented plaintiffs and that the Court of Appeal erred in reversing that portion of the trial court's judgment.
B. The Breach of Contract Cause of Action
Plaintiffs argue on a breach of contract theory that they are entitled to overtime compensation for walk time that the state did not properly accredit to them as compensable worktime. Plaintiffs rely on White v. Davis (2003) 30 Cal.4th 528 [133 Cal.Rptr.2d 648, 68 P.3d 74] and Madera Police Officers Assn. v. City of Madera (1984) 36 Cal.3d 403 [204 Cal.Rptr. 422, 682 P.2d 1087]. In White and Madera, we recognized an exception to the general principle that public employment is a creature of statute or ordinance, not contract. Specifically, we held that although the terms of public employment are legislatively determined, when a public agency employee has completed his or her work in accordance with those legislative terms, the employee's right to receive compensation for the completed work ripens into a contractual right that is protected by the contract clause of the state Constitution. Thus, in Madera, the court said: "`[T]o the extent services are rendered under statutes or ordinances then providing mandatory compensation for authorized overtime, the right to compensation vests upon performance of the overtime work, ripens into a contractual obligation of the employer and cannot thereafter be destroyed or withdrawn without impairing the employee's contractual right.'" (Madera, at p. 413, italics added, quoting Longshore v. County of Ventura (1979) 25 Cal.3d 14, 23 [157 Cal.Rptr. 706, 598 P.2d 866].) Likewise, in White, we said: "[P]ast California cases clearly establish that although the conditions of public employment generally are established by statute rather than by the terms of an ordinary contract, once a public employee has accepted employment and performed work for a public employer, the employee obtains certain rights arising from the legislative provisions that establish the terms of the employment relationship—rights that are protected by the contract clause of the state Constitution from elimination or repudiation by the state.... [A] number of cases have stated broadly that among the rights protected by the contract clause is `the right to the payment of salary which has been earned.'" (White, at p. 566, italics added, quoting Kern v. City of Long Beach (1947) 29 Cal.2d 848, 853 [179 P.2d 799].) We recently reaffirmed these conclusions in Cal Fire Local 2881 v. California Public Employees' Retirement System (2019) 6 Cal.5th 965 [244 Cal.Rptr.3d 149, 435 P.3d 433].
These cases do not help plaintiffs except insofar as the legislatively created terms of their employment included walk time that these employees actually worked and that the state failed to compensate. As to the represented plaintiffs, the Legislature approved the MOUs governing their employment, and it also approved the last, best, and final offer that applied during the 44-month impasse period in which no MOU was in place. We have already determined that in light of those legislative approvals, the represented plaintiffs' claims for additional compensation fail. Under White and Madera, plaintiffs' contractual rights are derivative of and limited by the legislatively created terms of their employment. Accordingly, we agree with the Court of Appeal that the trial court properly rejected the represented plaintiffs' claims for overtime compensation on a breach of contract theory.
As to the unrepresented plaintiffs, the Legislature delegated its power to set the terms of their employment to two administrative agencies, the IWC and CalHR, and we have already determined that CalHR's Pay Scale Manual, which adopts the FLSA definition of compensable worktime, controls the unrepresented plaintiffs' right to compensation. To the extent the breach of contract claims of these plaintiffs are based on the failure to pay overtime for entry-exit walk time, such time is not compensable under the Pay Scale Manual's narrow definition of compensable worktime, and therefore their claims lack merit. To the extent, however, that their claims are based on the failure to pay overtime for duty-integrated walk time, such time is compensable under the Pay Scale Manual's narrow definition of compensable worktime. The unrepresented plaintiffs, having alleged that they performed such work and did not receive overtime compensation for it, may have a contractual interest in receiving that compensation. Whether they do depends, of course, on whether they can prove their allegations in future phases of the trial.
Accordingly, we agree with the Court of Appeal that the trial court erred in rejecting the breach of contract claims of the unrepresented plaintiffs, although we do not agree with the Court of Appeal that the unrepresented plaintiffs can seek overtime compensation based on the broad definition of compensable worktime that appears in Wage Order No. 4. Rather, they can only do so based on the FLSA's narrower definition of compensable worktime, a definition that excludes entry-exit walk time.
C. Labor Code Sections 222 and 223 Cause of Action
We agree with the Court of Appeal that the trial court properly rejected the plaintiffs' claims for overtime compensation under Labor Code sections 222 and 223.
Labor Code section 222 states: "It shall be unlawful, in case of any wage agreement arrived at through collective bargaining, either wilfully or unlawfully or with intent to defraud an employee, a competitor, or any other person, to withhold from said employee any part of the wage agreed upon."
Labor Code section 223 states: "Where any statute or contract requires an employer to maintain the designated wage scale, it shall be unlawful to secretly pay a lower wage while purporting to pay the wage designated by statute or by contract."
It is not at all clear that there is a private right of action for violation of Labor Code sections 222 and 223 (see Lab. Code, § 225.5 [specifying civil penalties that the Labor Commissioner may recover]), nor is it clear that these Labor Code provisions apply against the state government (see Campbell v. Regents of University of California (2005) 35 Cal.4th 311, 330 [25 Cal.Rptr.3d 320, 106 P.3d 976] ["`Generally, ... provisions of the Labor Code apply only to employees in the private sector unless they are specifically made applicable to public employees.'"]). In any case, Labor Code section 222, by its terms, applies only when an employer withholds "the wage agreed upon" in "any wage agreement." Thus, it does not apply to the unrepresented plaintiffs, whose employment was not governed by an agreement. As to the represented plaintiffs, we have already concluded that they cannot show, as a factual matter, that duty-integrated walk time ever went uncompensated, and we have further concluded that the MOUs expressly precluded compensation for entry-exit walk time. Accordingly, defendants did not withhold "the wage agreed upon" in a "wage agreement," and plaintiffs' Labor Code section 222 claims are without merit.
Plaintiffs' claims for overtime compensation under Labor Code section 223 fare no better. Section 223 is concerned with "secret deductions or `kickbacks'" that are not the subject matter of plaintiffs' allegations. (Kerr's Catering Service v. Department of Industrial Relations (1962) 57 Cal.2d 319, 328 [19 Cal.Rptr. 492, 369 P.2d 20].) Plaintiffs allege, rather, that defendants applied too narrow a definition of compensable worktime and, therefore, that plaintiffs were not paid overtime compensation for some of the work they performed. We conclude that defendants did not apply the wrong definition of compensable worktime, but even if they had done so, that error would not amount to "secretly pay[ing] a lower wage while purporting to pay the wage designated by statute" (Lab. Code, § 223), because there was nothing hidden or deceptive about defendants' payment practice. (See Prachasaisoradej v. Ralphs Grocery Co., Inc. (2007) 42 Cal.4th 217, 236 [64 Cal.Rptr.3d 407, 165 P.3d 133].) Rather, defendants were forthright from the outset that they believed the narrow FLSA definition of compensable worktime applied.
III. CONCLUSION
We affirm the judgment of the Court of Appeal insofar as it rejected the claims of the represented plaintiffs.
We reverse the judgment of the Court of Appeal insofar as it allowed the unrepresented plaintiffs' minimum wage claims to proceed.
We affirm the judgment of the Court of Appeal insofar as it allowed the unrepresented plaintiffs' breach of contract claims to proceed, but we conclude that those claims should be limited to seeking unpaid overtime compensation based on the FLSA's definition of compensable worktime, not based on the broader definition that appears in Wage Order No. 4.
We affirm the judgment of the Court of Appeal insofar as it rejected the unrepresented plaintiffs' claims under Labor Code sections 222 and 223.
We remand the case to the Court of Appeal with instructions to remand to the trial court for further proceedings consistent with this opinion. During such proceedings, defendants can raise any defenses that the trial court did not reach in its previous consideration of the case.
Cantil-Sakauye, C. J., Corrigan, J., Kruger, J., and Groban, J., concurred.
LIU, J. Concurring and Dissenting.—
I agree with today's opinion that the represented plaintiffs cannot pursue claims for duty-integrated walk time for the period when a memorandum of understanding (MOU) was in effect. The represented plaintiffs appear to have explicitly bargained for a specific amount of compensation for duty-integrated time, and they do not allege that the state failed to pay the agreed-upon amount. (Maj. opn., ante, at pp. 738-739.) With regard to the unrepresented employees, I agree that the Department of Human Resources (CalHR) Pay Scale Manual's definition of compensable work does not expressly include entry-exit walk time and that the state therefore has no obligation to pay regular or overtime compensation for that time. (Id. at pp. 728-729.) I also agree that plaintiffs' Labor Code section 222 and section 223 claims are without merit; the record contains no evidence that the state unlawfully withheld wages or paid the employees a lower rate in violation of an agreed-upon contract. (Maj. opn., ante, at p. 751.)
I disagree, however, with the court's rejection of the represented plaintiffs' and unrepresented plaintiffs' minimum wage claims for entry-exit walk time. (Maj. opn., ante, at pp. 723-724, 737-749.) The 2001 revisions to the Industrial Welfare Commission's (IWC) wage order No. 4-2001 (Wage Order No. 4) extended minimum wage protections to rank-and-file employees of the state government. (Wage Order No. 4, § 1(B); see Cal. Code Regs., tit. 8, § 11040.) Because Wage Order No. 4 extended the state's broad definition of compensable work to the represented employees, and because there is no clear indication that the represented employees agreed to forgo that right in the relevant MOUs, I would allow their minimum wage claims to proceed. In addition, because the CalHR Pay Scale Manual can be harmonized with the requirements of Wage Order No. 4, I see no obstacle to giving effect to both schemes in a manner that allows the unrepresented employees to pursue minimum wage compensation for entry-exit walk time under the wage order. Our longstanding rule that we interpret state wage and hour laws to "promote employee protection" (Mendiola v. CPS Security Solutions, Inc. (2015) 60 Cal.4th 833, 840 [182 Cal.Rptr.3d 124, 340 P.3d 355]) compels me to dissent from those portions of today's opinion.
I.
Today's opinion concludes that the represented plaintiffs "agreed through the collective bargaining process to forgo compensation for entry-exit walk time." (Maj. opn., ante, at p. 740.) But nothing in the text of the MOUs or the record of the bargaining history indicates that the California Correctional Peace Officers Association (CCPOA) intended to forgo any entitlement that its members may have to minimum wage compensation for entry-exit walk time under Wage Order No. 4.
Through the MOUs, the represented plaintiffs "agreed to four hours' pay for `pre and post work activities' in a recurring 28-day work period, and the record supports the trial court's finding that the phrase `pre and post work activities' was used by the parties to refer to duty-integrated walk time." (Maj. opn., ante, at p. 738.) In concluding that the represented plaintiffs agreed to forgo compensation for entry-exit walk time, the court explains that each MOU "included a heading that read `Entire Agreement,' followed by a provision that stated: `This [MOU] sets forth the full and entire understanding of the parties regarding the matters contained herein ....' ... Because the MOUs `set[] forth the full and entire understanding of the parties regarding the matters contained [t]herein,' and because compensation for pre- and postwork activities was one of the `matters contained' in each of the MOUs, the MOUs precluded compensation for entry-exit walk time by not making any provision for it." (Id. at p. 740.)
Although it may be plausible to adopt such a reading of the MOUs, it is equally plausible to understand "the matters contained herein" as referring only to matters addressed by the specific provisions of the MOUs—i.e., duty-integrated walk time, and not "compensation" generally or "pre- and postwork activities" generally. On this view, the parties reached an agreement on compensation for duty-integrated walk time and simply did not reach an agreement on entry-exit walk time.
But even if we assume the represented plaintiffs agreed to forgo compensation for entry-exit walk time in the 1998-1999 MOU, it is clear from the bargaining history that they did not agree to forgo any current or future protections to which they may be entitled under state wage and hour law. At no point during negotiations over the 1998-1999 MOU was there any indication that the contract provisions addressing "pre- and postwork activities" were meant to displace state wage and hour law. When questioned at trial, the state's chief negotiator, David Gilb, testified that there was no discussion about CCPOA waiving any of its members' state wage and hour law rights. According to Gilb, "The issue never came up in bargaining":
"Q: Do you recall there any being [sic] discussion whatsoever during the 1998 negotiations with respect to whether CCPOA was offering to or attempting on behalf of its members to waive any state wage and hour laws?
"A: They were not.
"Q: Do you recall any discussions during the 1998-1999 negotiations in which any representative of CCPOA made any concession or statement that you interpreted as a concession that state minimum wage law was either waived or otherwise agreed to not be utilized in determining the rights of CCPOA members?
"A: They made no statements. The issue never came up in bargaining.
"Q: So [sic] the extent that you do not recall any discussion of state wage and hour law, you would agree nobody at CCPOA made a statement or comment that was communicated to the State that you interpreted as an intent to waive any such wage and hour rights of the employees.
"A: It did not."
It is not surprising that the parties did not discuss any waiver by CCPOA of its members' right to minimum wage compensation at the time of the 1998-1999 MOU negotiation. In 1998, the IWC wage orders did not require state employers to provide minimum wage compensation. (Maj. opn., ante, at pp. 724-725.) In 2001, however, Wage Order No. 4 was amended to extend minimum wage compensation to state employees, and this guarantee, which has the same dignity and force as statutory law (Brinker Restaurant Corp. v. Supreme Court (2012) 53 Cal.4th 1004, 1027 [139 Cal.Rptr.3d 315, 273 P.3d 513] (Brinker)), arguably extends to entry-exit walk time. (Maj. opn., ante, at pp. 725-726; see Morillion v. Royal Packing Co. (2000) 22 Cal.4th 575, 587-588 [94 Cal.Rptr.2d 3, 995 P.2d 139].) Nothing in the bargaining history of the 1998-1999 or later MOUs suggests that the represented plaintiffs ever agreed to forgo the benefits of this change in the law. Even if the represented plaintiffs agreed to forgo minimum wage compensation for entry-exit walk time at a time when they had no right to such compensation under state law, that agreement cannot plausibly be understood to include agreement to forgo such compensation at a time when they did have a right to such compensation under state law. As the quotations from Gilb's testimony show, CCPOA never agreed to waive any of its members' rights to current or future wage and hour protections under state law.
The 2001 revision to Wage Order No. 4 changed the default law governing the relationship between state employers and their employees. From 2001 onward, the burden was on the employer to seek a concession from its employees that entry-exit walk time would not be compensable in future MOUs. Yet nothing in the bargaining history of the subsequent MOUs indicates that the parties revisited this issue or that CCPOA later agreed to waive any right its members may have to minimum wage compensation under the amended wage order in exchange for some other benefit. Thus, there is no basis in the text or bargaining history of any of the MOUs, either before or after 2001, for concluding that the represented plaintiffs agreed to forgo minimum wage compensation for entry-exit walk time under Wage Order No. 4 as revised in 2001.
Today's decision awards the employer an exemption from Wage Order No. 4's potential applicability to entry-exit walk time, even though the parties never negotiated over this issue after the IWC extended the wage order's minimum wage requirement to state employees in 2001. On its face, the court's opinion seems to suggest that any state employee union seeking to preserve state law rights not addressed in an MOU's specific provisions must incorporate into the MOU an express reservation of all state law provisions conferring such rights, present or future. This is in substantial tension with extensive case law holding that waiver of statutory rights in collective bargaining occurs only when such waiver is "clear and unmistakable." (Choate v. Celite Corp. (2013) 215 Cal.App.4th 1460, 1465 [155 Cal.Rptr.3d 915]; see Vasserman v. Henry Mayo Newhall Memorial Hospital (2017) 8 Cal.App.5th 236, 245 [213 Cal.Rptr.3d 480]; Mendez v. Mid-Wilshire Health Care Center (2013) 220 Cal.App.4th 534, 543 [163 Cal.Rptr.3d 80]; Vasquez v. Superior Court (2000) 80 Cal.App.4th 430, 432 [95 Cal.Rptr.2d 294]; 14 Penn Plaza v. Pyett (2009) 556 U.S. 247, 272 [173 L.Ed.2d 398, 129 S.Ct. 1456] [same rule for federal statutory rights]; Metropolitan Edison Co. v. NLRB (1983) 460 U.S. 693, 708 [75 L.Ed.2d 387, 103 S.Ct. 1467].) "[S]ilence in a bargaining agreement with respect to an issue previously in dispute does not meet the test of `clear and unmistakable' language of relinquishment of that issue." (Oakland Unified School Dist. v. Public Employment Relations Bd. (1981) 120 Cal.App.3d 1007, 1011 [175 Cal.Rptr. 105].)
The court's reliance on the Legislature's approval of the post-2001 MOUs is also unavailing. Although the Ralph C. Dills Act (the Dills Act) (Gov. Code, § 3512 et seq.) allows for an MOU to supersede other state law, such supersession requires legislative approval (Gov. Code, § 3517.5) if an MOU would amend any statutory provision not specifically designated in the Dills Act itself. The Dills Act enumerates the statutory provisions over which "the memorandum of understanding shall be controlling without further legislative action" when a provision is "in conflict with the provisions of a memorandum of understanding." (Gov. Code, §§ 3517.6, 3517.61.) Wage Order No. 4 is not one of the enumerated provisions; thus, in order to supersede it, an MOU must be presented to and approved by the Legislature. Senate Bill No. 65 (2001-2002 Reg. Sess.), which authorized the 2001-2006 MOU at issue here, listed several statutory provisions that the MOU superseded, but it made no mention of Wage Order No. 4 or minimum wage compensation. (Sen. Bill No. 65 (2001-2002 Reg. Sess.) § 5.) And the parties have not pointed to anything in the bill's legislative history indicating that the MOU was intended to supersede the minimum wage provisions of Wage Order No. 4. Thus, the very legislation authorizing the 2001-2006 MOU confirms that the parties made no agreement displacing the represented plaintiffs' right to compensation for entry-exit walk time under Wage Order No. 4.
In sum, the 2001 revision to Wage Order No. 4 changed the baseline expectations with respect to minimum wage compensation for entry-exit walk time. Because there is no indication, much less a clear and unmistakable indication, that the represented plaintiffs agreed to waive any right they may have to such compensation in the post-2001 MOUs, I would allow their claim for such compensation to proceed.
II.
As for the unrepresented plaintiffs, today's opinion concludes that Wage Order No. 4 and CalHR's Pay Scale Manual are in "direct conflict" (maj. opn., ante, at p. 745) and "cannot be harmonized" (id. at p. 748) with respect to their definitions of compensable worktime, and that the Pay Scale Manual's definition must prevail because of "CalHR's more specific authority" (id. at p. 748). But I see no direct conflict here. Nor do I think it necessary or wise to opine on whether the Pay Scale Manual is entitled to the same degree of judicial deference as IWC wage orders. As the court acknowledges, we must accord great deference to IWC wage orders, and we must "harmonize[]" those orders with other statutory directives whenever possible. (Id. at p. 744.) Such harmony is achievable here because the Pay Scale Manual can be readily construed in a manner that poses no obstacle to the unrepresented plaintiffs' minimum wage claim for entry-exit walk time under Wage Order No. 4.
In interpreting wage orders, we have long observed the "remedial nature" of the legislative enactments empowering the IWC to regulate "wages, hours and working conditions for the protection and benefit of employees." (Industrial Welfare Com. v. Superior Court (California Hotel and Motel Association) (1980) 27 Cal.3d 690, 702 [166 Cal.Rptr. 331, 613 P.2d 579]; see id. at pp. 697-698 [IWC's authority also derives from art. XIV, § 1 of the Cal. Const.].) Wage orders are to be "liberally construed with an eye to promoting [employee] protection[s]" (Industrial Welfare, at p. 702), and "courts have shown the IWC's wage orders extraordinary deference, both in upholding their validity and in enforcing their specific terms" (Martinez v. Combs (2010) 49 Cal.4th 35, 61 [109 Cal.Rptr.3d 514, 231 P.3d 259] (Martinez)). Because wage orders have "the same dignity as statutes," they "must be given `independent effect' separate and apart from any statutory enactments." (Brinker, supra, 53 Cal.4th at p. 1027.) Thus, insofar as we are able, we are required to give "independent effect" to Wage Order No. 4's minimum wage protections "separate and apart from" the Pay Scale Manual. Even if the Pay Scale Manual is the product of "CalHR's more specific authority" (maj. opn., ante, at p. 748), we must still give effect to the terms of the IWC's wage order if possible. Only in the case of a direct and irreconcilable conflict may we consider declining to give effect to the wage order.
The text of the Pay Scale Manual contains nothing that expressly excludes the unrepresented employees from the wage order's coverage. Nor does it specifically address the availability of minimum wage compensation for entry-exit activities. By contrast, the 2001 revision to Wage Order No. 4 expressly extended the "Definitions" and "Minimum Wages" sections to apply to state employees (Cal. Code Regs., tit. 8, § 11040, subd. 1(B)), even as the provisions addressing "Daily Overtime" and "Alternative Workweek Schedules" were not extended to apply to state employees (id., subd. 3(A) & (B)(3)). There is no conflict between the Pay Scale Manual and Wage Order No. 4: The Pay Scale Manual governs the regular and overtime pay of the unrepresented employees as members of "Work Week Group 2," and Wage Order No. 4 governs their entitlement to minimum wage compensation for other time worked.
Thus, Wage Order No. 4 and the Pay Scale Manual are overlapping administrative schemes that can both be enforced. Wage Order No. 4 defines compensable worktime broadly, using a definition that arguably includes entry-exit walk time. But Wage Order No. 4 applies only in part to state employees. Specifically, its minimum wage provision applies, but not its overtime provision (Wage Order No. 4, § 1(B)), and its minimum wage provision does not apply to administrative, executive, or professional employees (id., § 1(A)). Meanwhile, the Pay Scale Manual defines compensable worktime narrowly, incorporating the definition established by the federal Fair Labor Standards Act of 1938 (FLSA) (29 U.S.C. § 201 et seq.). But the Pay Scale Manual governs only the regular and overtime compensation of employees falling within Work Week Group 2; it says nothing about the minimum wage compensation of such employees for hours worked outside of its definition of compensable worktime. In short, Wage Order No. 4 and the Pay Scale Manual govern distinct forms of compensation, and there is no obstacle to enforcing both schemes simultaneously, each within its own sphere of application.
The court concludes that "the Pay Scale Manual occupies the field with respect to the compensation rates of state employees" (maj. opn., ante, at p. 749, fn. 19) because CalHR's regulations say: "Unless otherwise indicated in the pay plan, the rates of pay set forth represent the total compensation in every form except for overtime compensation." (Cal. Code Regs., tit. 2, § 599.671.) Although the court's reading of this regulatory language is reasonable, I do not think it is the only reasonable reading. The language also may be construed to mean that "the rates of pay set forth represent the total compensation in every form" for all hours worked that qualify as compensable worktime under the pay plan. In other words, within the sphere of application of the pay plan (here, the Pay Scale Manual), the pay plan exclusively sets forth "the rates of pay" comprising "total compensation in every form except for overtime compensation." Notably, the regulation does not use a "comprehensive" phrase such as "`notwithstanding any other provision of law,'" which "signals a broad application overriding all other code sections unless it is specifically modified by use of a term applying it only to a particular code section or phrase." (In re Marriage of Cutler (2000) 79 Cal.App.4th 460, 475 [94 Cal.Rptr.2d 156]; see Arias v. Superior Court (2009) 46 Cal.4th 969, 983 [95 Cal.Rptr.3d 588, 209 P.3d 923].) Because the regulation can be reasonably construed in a manner that does not displace the minimum wage requirement of Wage Order No. 4, that is the construction we must adopt in light of our obligation to give "`independent effect'" to the wage order if reasonably possible. (Brinker, supra, 53 Cal.4th at p. 1027.)
Today's opinion takes insufficient account of our long history of deference to IWC wage orders and unnecessarily suggests that the Legislature's delegation of authority to CalHR is enough to afford its manual the same dignity as IWC wage orders. (Maj. opn., ante, at p. 746.) There is no reason here to address whether an ordinary statutory delegation of authority is equivalent to a constitutionally authorized delegation of legislative, judicial, and executive authority, let alone a delegation of authority that has been affirmed repeatedly, over nearly a century, by "formal expressions of legislative and voter intent" construed to insulate the IWC's work from judicial interference. (Martinez, supra, 49 Cal.4th at p. 61; see Cal. Const., art. XIV, § 1.) The issue has not been briefed by the parties, and the court's discussion of this point is dictum in light of its conclusion that the wage order does not govern the unrepresented plaintiffs' claims.
In sum, I agree with the trial court that CalHR intended the FLSA standard to define compensable worktime for purposes of calculating the unrepresented plaintiffs' regular and overtime compensation. But this conclusion does not foreclose those plaintiffs' minimum wage claims. Although compensable worktime for the purpose of calculating regular and overtime compensation is governed by the narrow FLSA definition, compensable worktime for the purpose of paying the minimum wage is governed by the broader Wage Order No. 4 definition.
I respectfully dissent from the court's rejection of the represented plaintiffs' and the unrepresented plaintiffs' minimum wage claims.
Cuéllar, J., concurred.
Primary Work Location
Primary Work Location
Oman v. Delta Air Lines, Inc.
Primary Work Location
Oman v. Delta Air Lines, Inc.SOURCE:
KEY WORDS:
Primary Work Location, Wage and Hour, Labor Law, Location
AGENCY:
THE SUPREME COURT OF CALIFORNIA S248726
DEV ANAND OMAN et al., Plaintiffs and Appellants v. DELTA AIR LINES, INC., Defendant and Respondent. | No. S248726. Ninth Circuit 17-15124 Northern District of California 3:15-cv-00131-WHO |
_________________________
Opinion of the Court by Kruger, J.
Ninth Circuit
17-15124 Northern District of California
This opinion follows companion case S248702, also filed on June 29, 2020. Justice Kruger authored the opinion of the Court, in which Chief Justice Cantil-Sakauye and Justices Chin, Corrigan, Liu, Cuéllar, and Groban concurred. Justice Liu filed a concurring opinion, in which Justice Cuéllar concurred. Opinion of the Court by Kruger, J.
In this case, as in the companion cases Ward v. United Airlines, Inc., and Vidrio v. United Airlines, Inc. (June 29, 2020, S248702) ___ Cal.5th ___ (Ward), we confront a question about the application of various California wage and hour laws to flight attendants who work primarily outside California's territorial jurisdiction. Consistent with our holding in those cases, we conclude that California's wage statement laws apply only to flight attendants who have their base of work operations in California, and that the same is true of California laws governing the timing of wage payments. Finally, we hold that, whether or not California's minimum wage laws apply to work performed on the ground during the flight attendants' brief and episodic stops in California, the pay scheme challenged here complies with the state requirement that employers pay their employees at least the minimum wage for all hours worked.
I.
Defendant Delta Air Lines, Inc., is a national and international air carrier incorporated in Delaware and based in Georgia. Delta offers service in and out of roughly one dozen California airports, connecting cities as small as Palm Springs and as large as Los Angeles to the rest of the country and the world.
Plaintiffs Dev Anand Oman, Todd Eichmann, Michael Lehr, and Albert Flores are or were flight attendants for Delta. Oman lived in New York and had a New York airport as a home base. Lehr lives in Nevada but has a California airport as his home base. Eichmann and Flores both live in California and have California airports as their home bases. All four employees have served on flights in and out of California airports, as well as airports outside the state.
In 2015, the named plaintiffs (collectively Oman) filed a putative class action in federal court, alleging that Delta violates California labor law by failing to pay its flight attendants at least the minimum wage for all hours worked. According to the operative complaint, Delta's published work rules (hereafter Work Rules) pay flight attendants pursuant to formulas that compensate them on an hourly basis for certain hours worked but fail to provide any compensation at all for other working hours, in contravention of an obligation under California statutory and regulatory law to pay no less than the minimum wage for every hour worked. (See Lab. Code, §§ 1182.12, 1194, 1194.2; Industrial Welfare Commission (IWC) wage order No. 9-2001, § 4 (Wage Order No. 9).) Oman also alleged Delta fails to pay all wages in accordance with the semimonthly timeframe prescribed by Labor Code section 204 (section 204) and to provide comprehensive wage statements reporting hours worked and applicable hourly pay rates, as required by California's wage statement statute, Labor Code section 226 (section 226). Oman sought relief under these statutes, as well as civil penalties under the Labor Code Private Attorneys General Act of 2004 (Lab. Code, § 2698 et seq.) and restitution and injunctive relief under the unfair competition law (Bus. & Prof. Code, § 17200 et seq.).
On cross-motions for summary judgment, the district court concluded Delta's pay scheme does not violate California's minimum wage requirements. (Oman v. Delta Air Lines, Inc. (N.D.Cal. 2015) 153 F.Supp.3d 1094, 1095.) Oman argued that Delta fails to pay any compensation at all for certain hours worked in California and, under Gonzalez v. Downtown LA Motors, LP (2013) 215 Cal.App.4th 36 (Gonzalez) and Armenta v. Osmose, Inc. (2005) 135 Cal.App.4th 314 (Armenta), Delta is prohibited from borrowing compensation due for other hours worked to make up for any shortfall. The district court examined the pay formulas set out by Delta's Work Rules and concluded they adequately compensate flight attendants for all hours worked, without any impermissible borrowing or reduction in agreed-to contractual rates. (Oman, supra, 153 F.Supp.3d at pp. 1102-1107.)
The parties then filed cross-motions for summary judgment on Oman's remaining wage statement and timing claims. The district court granted judgment in favor of Delta, concluding that the relevant California statutes, sections 204 and 226, do not apply to Oman. The court held that the jurisdictional reach of the statutes should be determined according to a multifactor analysis that examines "the particular Labor Code provision invoked, the nature of the work being performed, the amount of work being performed in California, and the residence of the plaintiff and the employer." (Oman v. Delta Air Lines, Inc. (N.D.Cal. 2017) 230 F.Supp.3d 986, 992-993.) Here, "[f]ocusing on the purpose of Section 226 (to give employees clarity as to how their wages are calculated, so they can verify that their wages are calculated appropriately under California law), because the undisputed facts show that the named plaintiffs only worked a de minimis amount of time in California (ranging from 2.6% to a high of 14%), and in light of the nature of their work (necessarily working in federal airspace as well as in multiple other jurisdictions but during each pay period and day at issue)," the court concluded that section 226 does not apply to Oman's claims. (Oman, supra, 230 F.Supp.3d at p. 993, fn. omitted.) Seeing no argument for a different result under section 204, and because plaintiffs' counsel had conceded the statute should have a similar scope, the district court likewise rejected Oman's section 204 claims. (Oman, at p. 994.)
On appeal, the Ninth Circuit asked that we resolve three unsettled questions of California law underlying Oman's claims. (Oman v. Delta Air Lines, Inc. (9th Cir. 2018) 889 F.3d 1075, 1076-1077.) We accepted the request and agreed to resolve the following issues:
We have reframed these inquiries slightly. (Cal. Rules of Court, rule 8.548(f)(5).)
(1) Do sections 204 and 226 apply to wage payments and wage statements provided by an out-of-state employer to an employee who, in the relevant pay period, works in California only episodically and for less than a day at a time?
(2) Does California minimum wage law apply to all work performed in California for an out-of-state employer by an employee who works in California only episodically and for less than a day at a time? (See Lab. Code, §§ 1182.12, 1194; Cal. Code Regs., tit. 8, § 11090, subd. (4).)
(3) Does the Armenta/Gonzalez bar on averaging wages (see Armenta, supra, 135 Cal.App.4th 314; Gonzalez, supra, 215 Cal.App.4th 36) apply to a pay formula that generally awards credit for all hours on duty, but which, in certain situations resulting in higher pay, does not award credit for all hours on duty?
II.
A.
Our precedent makes clear that the application of California wage and hour protections to multistate workers like Oman may vary on a statute-by-statute basis. (See Sullivan v. Oracle Corp. (2011) 51 Cal.4th 1191, 1201 (Sullivan).) We thus consider separately each of the wage and hour statutes on which Oman relies, beginning with section 226. That provision requires an employer to supply each employee "semimonthly or at the time of each payment" a written wage statement disclosing the pay period and itemizing the hours worked, applicable hourly rates, gross and net wages earned, any deductions taken, and other relevant information. (§ 226, subd. (a).)
As we explained in Ward, supra, ___ Cal.5th ___, section 226 does not, in so many words, define its geographic reach. (Ward, at p. ___ [p. 21].) But we ordinarily presume the Legislature drafts laws with domestic conditions in mind (id. at p. ___ [p. 16]), and thus requires some degree of connection between the subject matter of the statutory claim and the State of California. In Ward, we addressed the nature of the connection required to trigger the wage statement requirements set forth in section 226 and held that section 226 applies when an employee's principal place of work is in California. Ordinarily, this test is met if an employee works primarily (i.e., the majority of the time) in California. In the case of interstate transportation workers and others who do not spend a majority of their working time in any one state, this test is satisfied when California serves as their base of work operations. (Ward, at pp. ___-___ [pp. 26-28].) Under this rule, because plaintiffs here never worked more than half the time in California (or in any other state), whether they are entitled to California-compliant wage statements hinges on whether they were based for work purposes in California.
The Ninth Circuit's question in this case appears to ask whether it is also relevant that Delta is a nonresident corporation. Delta now concedes that its foreign domicile does not foreclose the application of state law. We accept the concession. Section 226 contains no exemption based on the employer's location. This is in contrast to, for example, the worker's compensation scheme, which expressly exempts some out-of-state employers. (See Lab. Code, § 3600.5, subd. (b); Sullivan, supra, 51 Cal.4th at pp. 1197-1198.) The state's power to protect employees within its borders is not limited by whether the worker might be a nonresident or might be employed by a nonresident entity. (North Alaska Salmon Co. v. Pillsbury (1916) 174 Cal. 1, 5; see Kearney v. Salomon Smith Barney, Inc. (2006) 39 Cal.4th 95, 105 ["individual states may adopt distinct policies to protect their own residents and generally may apply those policies to businesses that choose to conduct business within that state"].) Instead, the onus ordinarily is on "a company that conducts business in numerous states . . . to make itself aware of and comply with the law of a state in which it chooses to do business." (Kearney, at p. 105.) To hold otherwise would, as Delta suggests, create an incentive for businesses employing individuals who work in California to avoid application of California law by locating their business operations outside the state. If employees are based for work purposes in California, that is sufficient to trigger the requirements of section 226, regardless of where their employer resides.
The proposed class in this case includes individuals who, like New York-based Dev Oman, neither perform their work predominantly in California nor are based for work purposes in the state. Oman urges us to apply a different rule than the one we have articulated in Ward. Although the operative complaint does not so specify, Oman clarifies in his briefing that unlike the Ward plaintiffs he does not seek comprehensive wage statements documenting all wages earned during a pay period. He argues instead that section 226 ought to be interpreted to require California-compliant documentation for those hours, however few they might be during any given pay period, when he worked on the ground in California. He contends this requirement should apply to any airline employee who ever works in California, even those who are based out of state.
This argument fails under the terms of section 226. Section 226 provides for the documentation of wages and other information over an entire pay period, not fractions thereof. A wage statement must specify not only "total hours worked" and "all applicable hourly rates," but also "gross wages," "net wages," and "all deductions" for the full period. (§ 226, subd. (a).) The statute contains no indication that the employer of an out-of-state worker must report fractions of wages earned during brief trips to the state, as well as attempt to calculate the fraction of wage deductions attributable to these sojourns. The statute requires "an accurate itemized statement" reflecting "the inclusive dates of the period for which the employee is paid" and all relevant information concerning the employee's pay during that period—that is, a single comprehensive statement of pay. (Ibid.)
Oman argues that our recent decision in Troester v. Starbucks Corp. (2018) 5 Cal.5th 829 supports his proposed fractional approach, but Troester has nothing to do with the question before us. There, stressing that the IWC's wage orders ensure compensation for " 'all hours worked' " (Troester, at p. 840, quoting IWC wage order No. 5-2001, §§ 3(A), 4(A)), we rejected the contention that state wage law would not concern itself with unpaid work on the order of a few minutes a day. Instead, we held that an "employer that requires its employees to work minutes off the clock on a regular basis or as a regular feature of the job may not evade the obligation to compensate the employee for that time by invoking the de minimis doctrine." (Troester, at p. 847.) That holding has no relevance here. The issue before us is not whether brief periods of work must be compensated—no one disputes the point—but whether a few minutes or hours of work in California necessarily trigger the detailed pay-period documentation requirements of California law. The answer to that question is no: Employees are entitled to California-compliant wage statements only if California is the principal place of their work.
Oman also argues that an approach based on the principal place of work will prove unworkable because coverage can only be determined in retrospect. But there is nothing unworkable about it. Wage statements are, of necessity, prepared in retrospect; their function is to record hours already worked and wages already earned. And if the location of an employee's job duties shifts radically during the course of employment—if, for example, a flight attendant takes on a new job as a gate agent at Los Angeles International Airport—the employer will have ample opportunity to adjust. Likewise, if the employee's base of operations changes because the employee is assigned to a different home airport, it will be a small matter to determine whether section 226 now applies.
It is, in the end, Oman's approach that poses greater practical concerns. By insisting on California-compliant wage statements, but only for the fraction of hours worked on the ground in California, Oman would effectively require that employers either (1) accompany each California-specific wage statement with multiple similar separate statements under the laws of each and every additional state in which an employee worked during a pay period, or (2) issue a single wage statement, but allow California law effectively to dictate the form and contents for documenting work predominantly performed in foreign jurisdictions. The first option would undermine the very purpose of section 226, which is "to ensure an employer 'document[s] the basis of the employee compensation payments' to assist the employee in determining whether he or she has been compensated properly." (Soto v. Motel 6 Operating, L.P. (2016) 4 Cal.App.5th 385, 390, quoting Gattuso v. Harte-Hanks Shoppers, Inc. (2007) 42 Cal.4th 554, 574.) This informational purpose would be ill-served by a rule that led to employees receiving a blizzard of wage statements every pay period, each documenting only a state-specific sliver of their work, and from this paper snowdrift trying to discern what they had actually been paid. As to the second option, allowing any work in California, no matter how fleeting, to effectively impose California law on documentation of all work in a pay period would raise the very sorts of conflict-of-laws problems we generally presume the Legislature seeks to avoid. (Ward, supra, ___ Cal.5th at pp. ___-___ [pp. 16-17].) It is presumably for this reason that Oman has avoided arguing that California law requires this result. We decline to construe section 226 as putting employers to the choice of either issuing a single California-compliant wage statement for every interstate worker who works for any amount of time, however brief, within the state, or issuing a multiplicity of statements, when the statute envisions that employees will receive just one.
The principal place of work rule we have articulated in Ward means that some short periods of work in California will not be covered by section 226's documentation requirements. Conversely, some periods of work outside California will be covered, if they occur as part of an overall period in which most work occurs inside this state or are performed by an employee who primarily works in no state but is based here. Such consequences are inevitable and unavoidable in a nation of 50 states where some forms of employment stretch across the land. But an understanding of section 226 that focuses on the principal place of an employee's work both serves the informational purposes the Legislature sought to achieve and minimizes the inevitable complications that would result from a rule that any work in one state, no matter how fleeting, is sufficient to trigger application of that state's wage reporting laws.
We thus conclude section 226 does not apply to work performed in California during pay periods in which the employee, based outside California, works primarily outside California. A non-California-based employee who works in California "only episodically and for less than a day at a time" (Oman v. Delta Air Lines, Inc., supra, 889 F.3d at p. 1077) is not entitled to a wage statement prepared according to the requirements of California law.
B.
We turn now to Oman's section 204 claim. That statute guarantees employees full payment on a semimonthly basis, providing: "All wages," with certain exceptions not relevant here, "earned by any person in any employment are due and payable twice during each calendar month, on days designated in advance by the employer as the regular paydays." (§ 204, subd. (a).) Section 204 goes on to establish specific deadlines by which wage payments must be made. (Id., subd. (a).) As is true of section 226, nothing in the statute explicitly specifies its intended geographic scope.
With certain exceptions not relevant here, "[l]abor performed between the 1st and 15th days, inclusive, of any calendar month shall be paid for between the 16th and the 26th day of the month during which the labor was performed, and labor performed between the 16th and the last day, inclusive, of any calendar month, shall be paid for between the 1st and 10th day of the following month." (§ 204, subd. (a).)
As Oman conceded in the federal district court (see Oman v. Delta Air Lines, Inc., supra, 230 F.Supp.3d at p. 994), there is no reason to interpret section 204's geographic coverage differently from that of section 226. That is because section 204 works hand in hand with section 226. Section 226 regulates the information an employer must provide in connection with wage payments, while section 204 regulates when an employer must pay an employee for hours worked. The Legislature has recognized that when an employee must be paid (the subject of § 204), and what information must accompany each such required payment (the subject of § 226) are necessarily linked. (See § 204, subd. (b)(2) [coordinating the application of these provisions].)
As with section 226, Oman seeks to apply section 204 only to those hours he worked within California. And as with section 226, reading the statute as Oman argues would pose difficulties that prove fatal to the argument. Again, there are two options: Either the employer must calculate and split out some portion of the wages due as attributable to work performed in California and pay only those on section 204's schedule, while paying other wages due in accord with whatever timing statutes might apply under other states' laws, or the employer must pay all wages due according to the schedule required under California law by section 204. These interpretations present the same issues as the corresponding options for complying with section 226.
The first interpretation, aside from the administrative headaches it would generate, runs headlong into the text of section 204, which applies to "[a]ll wages . . . earned," with exceptions not significant here. (§ 204, subd. (a), italics added.) As with section 226, nothing in the text