Wage and hour litigation has increased dramatically since the late 1990s, and that growth has led to a steady flow of appellate opinions interpreting often arcane laws. In 2007, the California Supreme Court decided four significant wage and hour cases and granted review in three others. The California Court of Appeal issued 20 published and 6 unpublished wage and hour decisions of note. The federal courts in California produced 11 significant opinions regarding state wage laws. Aside from these highlights, many other wage and hour decisions were released in 2007. Practitioners are well advised to hit the books before addressing any wage and hour issue--and they should be prepared for more turbulence throughout 2008.
The California Supreme Court made its biggest foray ever into wage and hour law in 2007, issuing decisions addressing meal breaks (Murphy v. Kenneth Cole Productions, Inc.1), unlawful deductions from wages (Prachasaisoradej v. Ralphs Grocery Company, Inc.2), arbitration of wage and hour claims (Gentry v. Superior Court3), and expense reimbursement (Gattuso v. Harte-Hanks Shoppers, Inc.4).
In Murphy, a unanimous supreme court held that the additional hour of pay imposed under Labor Code Section 226.7 for missed meal or rest breaks is a "wage," and a claim for its payment is subject to a three-year statute of limitation. In doing so, the court reversed the majority of court of appeal opinions on the issue. Interpreting Section 226.7 in light of the principle that "statutes governing conditions of employment are to be construed broadly in favor of protecting employees," the Murphy court reasoned that the plain meaning of Section 226.7 "appears to indicate" that its monetary remedy is wages or "premium pay." The noun "pay," in its ordinary usage, is interchangeable with "wage," and other provisions of the Labor Code use the terms interchangeably as well.
The court noted, however, that Section 226.7's language was also "reasonably susceptible" to the interpretation that the remedy was a penalty,5 so it relied on the legislative history of Section 226.7 to settle the question of whether the imposed payment constitutes a wage.6 Noting that the original bill contained both a monetary remedy available to employees and a fixed penalty to be paid to the state, the court concluded that the former was more like premium pay for overtime or on-call time, and the latter more like a classic penalty provision. When the latter was removed from the bill, what remained was a wage obligation.7
For more than a century, California law has consistently adhered to the principle that a statutory recovery is a penalty for limitations purposes when "an individual is allowed to recover against a wrong-doer, as a satisfaction for the wrong or injury suffered, and without reference to the actual damages sustained...."8 The fact that a penalty is not called a "penalty" is not controlling.9 What is controlling is whether the monetary recovery provided in Section 226.7 is proportionate to the injury. If employees lose 10 minutes of paid time off (the rest break), or the opportunity to go off the clock for 30 minutes (the meal break), they receive an hour of pay.
Murphy rejects a "functional" analysis of the issue, because none of the decisions in which the analysis has been used "involve the construction of Labor Code provisions, which are to be interpreted broadly in favor of the employee."10 The Murphy court also held that Section 226.7 is proportional to the injury, because it is designed to compensate for noneconomic injuries as well as economic ones. Thus the monetary recovery is similar to premium pay for overtime, for time spent on standby at the place of employment, or for split shifts.11
In Ralphs Grocery Company, Inc. v. Superior Court (Swanson),12 the Second District Court of Appeal held that any business expense that Labor Code Section 221 or the Wage Orders of the Industrial Welfare Commission (IWC) prohibit from being charged to an employee may not be deducted from gross revenue in calculating net profit if that net profit number is then used in calculating a profit-based bonus for employees. These business expenses include deductions for any part of the cost of workers' compensation claims and most deductions for cash shortages, breakage, or loss of equipment for nonexempt employees.13
In Prachasaisoradej, a closely divided California Supreme Court overruled Ralphs Grocery. The majority's analysis focused on the definition of "wages" contained in Labor Code Section 200 and construed it to mean "the amount the employer has offered or promised to pay, or has paid pursuant to such an offer or promise as compensation for that employee's labor."14 Accordingly, an employer deducts costs or expenses from an employee's wages "when it subtracts, withholds, sets off, or requires the employee to return, the compensation offered, promised, or paid as offered or promised, so that the employee, having performed the labor, actually receives or retains less than that paid, offered or promised compensation...."15
The employer in Prachasaisoradej fully paid employees their base compensation, and the employees' only expectation of bonus pay was based on the terms of the employer's plan. Thus the calculation of their bonus based on net profits does not amount to a deduction from wages of the losses deducted from revenues to determine net profits.16
In Gentry, the supreme court declined to adopt a bright-line rule urged by the plaintiffs that would have invalidated all class relief waivers in arbitration agreements covering wage and hour disputes. It chose instead to extend its decision in a consumer class action, Discover Bank v. Superior Court,17 to employment-related arbitration agreements.
The supreme court held that trial courts should examine four factors to determine whether a waiver of class relief in arbitration is substantively unconscionable:18
• The value of the plaintiff's claim. The court in Gentry held that Discover Bank is not limited to "actions involving miniscule amounts of damages." Although the court concluded that "individual awards in wage and hour cases tend to be modest," it also suggested that claims worth as much as $20,000 to $40,000 might still be too small to permit a waiver of class relief.
• The risk current employees--especially those "further down the corporate hierarchy"--face that the employer will retaliate against them for bringing a claim.
• Whether "some individual employees may not sue because they are unaware that their legal rights have been violated." This factor focuses on putative class members, rather than the individual plaintiff at issue.
• "[O]ther real world obstacles to the vindication of class members' rights,"19 such as the possibility that "the employer's cost of paying occasional judgments and fines may be significantly outweighed by the cost savings of not paying overtime."20
The dissent in Gentry accuses the majority of "elevat[ing] a mere judicial affinity for class actions as a beneficial device for implementing wage laws above the policy expressed by both Congress and our own Legislature that voluntary individual agreements to arbitrate...should be enforced according to their terms."21 The Federal Arbitration Act (FAA)22 requires state and federal courts to enforce the terms of arbitration contracts, unless they either 1) fail to "evidenc[e] a transaction involving commerce," or 2) are subject to "such grounds as exist at law of equity for the revocation of any contract." No "additional limitations under state law" may be applied to invalidate an enforceable arbitration agreement.23 In Discover Bank, the California Supreme Court acknowledged the "critical distinction made by the [U.S. Supreme Court] between a ‘state-law principle that takes its meaning precisely from the fact that a contract to arbitrate is at issue,' which is preempted by section 2 of the FAA, and a state law that ‘govern[s] issues concerning the validity, revocability, and enforceability of contracts generally,' which is not."24
In accordance with its interpretation of this distinction, the real party in interest in Gentry raised objections based on FAA preemption. However, the Gentry court dismissed the objections, finding instead that state law was applicable. The Gentry court held that it did not "accept Circuit City's argument that a rule invalidating class arbitration waivers discriminates against arbitration clauses in violation of the Federal Arbitration Act...."25
In Gattuso, the supreme court held that an employer can satisfy its obligation under Labor Code Section 2802 to reimburse employees for business expenses by paying them "enhanced compensation" (such as a higher salary or commission). It may do so only when 1) the pay scheme allows an employee "to apportion the enhanced compensation to determine...what amount is reimbursement"26 and 2) the amount is sufficient to fully reimburse the employee.27
Because automobile expenses were at issue in Gattuso, the court also provided further guidance on this type of expense reimbursement. It held that an employer may properly reimburse an employee in three different ways: The employer can 1) pay employees "the automobile expenses that the employee actually and necessarily incurred," 2) "multipl[y] the work-required miles driven by a predetermined amount," specifically, the per-mile rate established by the federal Internal Revenue Service for tax credits (50.6 cents in 2008), or 3) pay employees a regular "lump sum" (such as a "per diem, car allowance, [or] gas stipend").28
The Vanishing Administrative Exemption
In 2007, the California Court of Appeal continued to construe the administrative exemption to wage and hour laws to limit its application to high-level administrators. The California Supreme Court is now poised to decide whether it agrees.
Although the IWC Wage Orders expressly reference federal regulations for the nonquantitative elements of the administrative exemption, a 2001 First District decision, Bell v. Farmers Insurance Exchange (Bell II),29 held that insurance adjusters did not meet the exemption, even though the same types of adjusters later were held by the Ninth Circuit to meet the federal exemption (perhaps influenced by amended federal regulations).30 The end result was one of the largest wage and hour jury verdicts in California history--over $120 million.31 In a pair of 2007 decisions, the Second and Third Districts joined the First District in interpreting California's administrative exemption more narrowly than the administrative exemption provided by the Federal Labor Standards Act (FLSA).
In Eicher v. Advanced Business Integrators, Inc.,32 the Third District addressed the requirement in the Wage Orders that an administratively exempt employee's "duties and responsibilities involve...office or non-manual work directly related to management policies or general business operations...."33 According to the court, an administratively exempt employee must either 1) "participate in policy making" or 2) "[alter] the general business operations of the business."34 Whether the employee falls into the first category or the second, the employee must have a "personal effect on the policy or general business operations."35 If an employee fails to meet these criteria, he or she is a "production employee...whose primary duty is producing the commodity or commodities, whether goods or services, that the enterprise exists to produce."36
In Eicher, the employee in question, a software consultant, was responsible for setting up the software sold by his employer on customers' computer networks, and training customers' employees to use the software. The court found that he was a nonexempt production worker who "regularly engaged in the core day-to-day business of" his employer.37
In reaching this conclusion, the Eicher court minimized the fact that the Wage Orders expressly provide that "[t]he activities constituting exempt work and non-exempt work shall be construed in the same manner as such terms are construed" in certain enumerated federal regulations.38 One of those regulations is former 29 C.F.R. Section 541.205, which is incorporated by reference in current state regulations. Section 541.205 directly contradicts the holding of Eicher.
The regulation states that "the phrase ‘directly related to management policies or general business operations' is not limited to persons who participate in the formulation of management policies or in the operation of the business as a whole."39 Rather, it includes employees who carry out "major assignments" related to a "particular segment of the business."40 Eicher notes that the employer failed to cite the regulation in the trial court and rejected the sweep of the federal regulation by concluding that "we have found no evidence that California courts have found persuasive under California law this expansive definition of an exempt administrative employee." Moreover, the court claimed that adopting the regulation would be contrary to the "command to interpret exemption statutes narrowly to protect employees."41 Thus, Eicher arguably stands not only for the proposition that an administratively exempt employee not only must have a "personal effect on the policy or general business operations"42 of the employer but that he or she must affect policies or operations of the business as a whole.
So Eicher rests on shaky ground. The "command to interpret exemption statutes narrowly"43 has never been held to trump the rule that "‘[r]egulations and orders of the Industrial Welfare Commission are presumed to be reasonable and lawful.'"44 The IWC, which promulgates the Wage Orders, exercises authority of a "quasi-legislative nature," and enjoys a "considerable degree of policy-making judgment and discretion."45 The same canons of construction applicable to statutes are also applicable to the Wage Orders.46 Eicher's interpretation of the administrative exemption renders part of the IWC's language (the express incorporation of Section 541.205) mere surplusage--an outcome that should be avoided in the interpretation of wage orders no less than statutes enacted by the legislature.47
The decision in Harris v. Superior Court48 took a slightly different tack to defend Eicher's interpretation of the Wage Orders. Harris--decided by a split panel of the Second District Court of Appeal that was influenced by Bell II--freely acknowledges that the federal regulations should guide California courts in interpreting the administrative exemption.49 Nevertheless, Harris concludes that the regulations "interpret the ‘directly related' language as encompassing two requirements, i.e., that the work be of the proper type (administrative, as opposed to production work) and that the work be of ‘substantial importance.'"50 Section 541.205(c)--which directly contradicts Eicher's holding--"focused exclusively on the substantial importance requirement."51 This leaves the Harris majority free to conclude that workers who "carr[y] out the particular, day-to-day operations of the business"52 do not perform administrative work, even if their work is of "substantial importance" to the business (or even if Eicher's interpretation of "substantial importance" turns out to be wrong).53
This analysis permits the majority to ignore language in Section 541.205(c) that specifically addresses the type of employees at issue in Harris--claims adjusters. Subsection (c)(5) of the regulation specifically provides that "[t]he test of ‘directly related to management policies or general business operations' is also met by many persons employed as...claim agents and adjusters...." Since this only goes to the importance of claims adjustment work in the majority's view, it does not contradict the conclusion that, regardless of importance, the type of work performed by the claims adjusters in question is not administrative.54
By holding that the "administrative/production worker dichotomy" is a test for the type of work that counts as "administrative" rather than for the level of importance that satisfies the exemption, the Harris majority was forced to engage in verbal acrobatics. Some of these reveal that the distinction, relied on by the majority, between the type of work versus its importance is too weak to sustain the analysis--a point made by the dissent. The majority concluded that "producing the employer's product is not a necessary condition for doing production, as opposed to administrative, work" and focused on the example of a legal secretary in a law firm. The secretary cannot "produce the firm's product," because if the secretary did, the firm would be engaging in the unauthorized practice of law. "But the work of the secretary is paradigmatically nonexempt production work. It has nothing to do with policy or general business operations (except in the sense that, like every employee's work it is governed by policy)."55
The majority did not need to resort to such a strained analysis to support its intuition that a legal secretary does not qualify for the administrative exemption. A legal secretary clearly engages in the type of work to which the administrative exemption might apply--"office or non-manual work"--but that work is not sufficiently important to be "directly related to management policies or general business operations."56 But applying this simpler, more straightforward analysis to the claims adjusters at issue in Harris would not have permitted the majority's conclusion that they are nonexempt.57
The supreme court declined to review this question in Eicher but agreed to review Harris and stated the issue it would address: "Do claims adjusters employed by insurance companies fall within the administrative exemption...?" That statement should be broad enough to reach not only the reasoning in Harris but also Bell II.
Since the rise of wage and hour class actions, plaintiffs have argued without fail that "the employer creates the class." In these cases, employers uniformly classified their employees as exempt without paying attention to variations in how individual employees perform their jobs. As a result, the employers cannot claim that these variations prevent class certification when employees challenge how they are classified. Over the years, the courts have gone both ways on this argument. Some judges accept it, others do not. In 2007, the First District decisively rejected it.
In Alba v. Papa John's USA, Inc.,58 a federal district court certified a class of pizza shop managers asserting that they were misclassified as exempt. The court based its decision to certify on two grounds: 1) the employer ‘made the class' by uniformly classifying the managers as exempt, and 2) the employer imposed standardized operational practices on its stores.59 In doing so, the Alba court placed great reliance on earlier district court opinions that certified similar claims on similar grounds, such as Tierno v. Rite Aid Corporation60 and Wang v. Chinese Daily News, Inc.61
About a month after Alba was decided, the California Court of Appeal rejected the federal court's rationale, as well as the rationale of Tierno and Wang, in Walsh v. IKON Office Solutions, Inc.62 The trial court in Walsh first certified, but later partially decertified, a class of copy service managers who claimed they were misclassified as exempt. Their claim was based on the ground that the application of the outside sales exemption raised inherently individualized issues concerning how managers allocated time to various job duties. The First District affirmed, rejecting as a matter of law the plaintiffs' theory of "deliberate willful misclassification":
In arguing that IKON could be liable without regard to the work the account managers performed, appellants assume that an employer is liable if it classifies employees without regard to the law or investigating what work they do, even if the employees were, in fact, subject to the exemption. While such action on the part of an employer may be "deliberate" and "willful," it is not "misclassification."63
The Walsh court also clarified an important procedural issue encountered in certifying wage and hour claims. Plaintiffs often argue that their burden of proof on a class certification motion is limited to proving that their overtime claim is amenable to class treatment. Since exemption is an affirmative defense rather than part of the plaintiff's case-in-chief, individualized issues in applying an exemption defense should not prevent certification of an overtime claim. The First District squarely rejected this argument as well:
The affirmative defenses of the defendant must also be considered, because a defendant may defeat class certification by showing that an affirmative defense would raise issues specific to each potential class member and that the issues presented by the defense predominate over common issues.64
In a similar vein, Division One of the Fourth District issued an unpublished decision in Brinker Restaurant Corporation v. Superior Court65 reversing a class certification order. The order treated the question of "what [the employer] must do to comply with the Labor Code" as one that was predominant and common enough to justify class treatment. However, disputed legal issues involving the elements of a plaintiff's claims are not the type of common issues that a trial court should consider in deciding whether to certify a class.
Nevertheless, in a pair of post-Walsh decisions, federal district courts adhered to the rule of Alba, Tierno, and Wang. In one of these cases, In re Wells Fargo Home Mortgage Overtime Pay Litigation,66 the court did not even acknowledge Walsh. It certified a class of home loan consultants, even though the employer "raised serious issues regarding individual variations among [class members'] job duties and experiences."67 In the other, Krzesniak v. Cendant Corporation,68 the court distinguished Walsh by pointing out that the plaintiff was "not arguing that [the employer] could be liable without regard to the work [class members] performed," as did the plaintiff in Walsh.69 However, in the very next paragraph the Krzesniak court chided the employer for "ignor[ing] the fact that Plaintiff is challenging Defendant's policy of classifying all managers as exempt."70 It held that "Defendants cannot, on the one hand, argue that all managers are exempt from overtime wages and, on the other hand, argue that the Court must inquire into the job duties of each manager in order to determine whether the manager is exempt."71 This is, of course, precisely what Walsh held an employer could do--as a matter of law, a plaintiff cannot challenge an employer's policy of uniform exempt classification without regard to whether the employees are, in fact, exempt.72
The individualized factual issues raised by the employer in Walsh were based on the different proportions of work time that managers devoted to their various duties.73 Similar strategies proved successful for employers in Vinole v. Countrywide Home Loans, Inc.,74 Maddock v. KB Homes, Inc.,75 and the Home Depot Overtime Cases.76 Vinole states the rule succinctly: "[I]n cases where exempt status [depends] upon individualized determination of an employee's work, and where plaintiffs allege no standard policy how employees spend their time, common issues of law and fact may not predominate."77
But when exempt status does not depend on individualized assessments of employees' work, the court of appeal is more than willing to order certification, notwithstanding the "great discretion"78 possessed by trial courts over certification decisions. In Bell v. Superior Court,79 the Second District granted writ relief and reversed a denial of class certification of truck drivers potentially subject to the motor carrier exemption. The court, in a depublished opinion, reasoned that the trial court's determination that individual issues predominated in determining whether employees met the exemption lacked substantial evidence because the exemption could be resolved on a terminal-by-terminal basis at worst and did not require a separate inquiry for each class member.80
Unresolved Break Issues
In 2007 the California Supreme Court answered a host of questions concerning California's meal and rest break laws in Murphy, but it left many others unanswered.81 Probably the next big issue in meal break litigation--and one that Murphy does not settle--is whether employers must force employees to stop working to take a meal break, or whether the employer satisfies its obligations under Labor Code Section 512 when it provides a timely opportunity for employees to punch out and take a break. No similar debate exists for rest breaks. The Division of Labor Standards Enforcement (DLSE) takes the position that an employer satisfies its rest break obligations by giving employees the opportunity to take timely breaks. Employees may decline to take a break if they wish. However, employers have "an affirmative obligation to ensure that workers are actually relieved of all duty" during meal breaks.82
In White v. Starbucks Corporation,83 a federal district court rejected the DLSE's position, holding that an employer need only offer meal breaks, and that to recover premium wages under Labor Code Section 226.7, the "employee must show that he was forced to forego his meal breaks as opposed to merely showing that he did not take them regardless of the reason." The rule endorsed by the DLSE "would be impossible to implement for significant sectors of the mercantile industry (and other industries) in which large employers may have hundreds or thousands of employees working multiple shifts."84
Brinker cites White with apparent approval, although the Fourth District ultimately declined to rule on the issue, remanding it to the trial court for determination.85 At the request of the court of appeal, the supreme court summarily granted review of Brinker, vacated the initial unpublished opinion, and remanded the case back to the court of appeal. It seems likely that the Fourth District will issue a new, and published, opinion in 2008.
In early 2008, a second federal district court issued an opinion concurring with, and extending the reasoning of, White. In Brown v. Federal Express Corporation,86 the court concluded that the language of Labor Code Sections 226.7, 512, and the Wage Orders was "consistent with an obligation to make [meal] breaks available, rather than to force employees to take breaks."87 "Indeed," noted the Brown court, "in characterizing violations of California meal period obligations in Murphy, the California Supreme Court repeatedly described it as an obligation not to force employees to work through breaks."88 Furthermore, the DLSE's position "would also create perverse incentives" for employees to violate employer meal break policies in order to collect extra pay.89
Whether an employer satisfies its obligation to provide a meal or rest break by giving employees a timely opportunity to take breaks, or whether the employer is required to make employees stop working during breaks, has significant implications for class certification of break claims. For example, the Brinker court held that if there is no dispute over the fact that an employer need only provide an opportunity for a rest break, "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 individual proof" that an employer broke the law.90 Brown reaches a similar conclusion.91 Whether the DLSE's views on an employer's "affirmative obligation" regarding meal breaks is correct or not should be highly pertinent to class certification of meal break claims.
This question was accorded its proper place in Brinker and Brown. Other class certification decisions in 2007 made assumptions about the issue without any serious consideration of it. In Alba,92 for example, a federal district court certified a class of pizza shop employees asserting meal and rest break claims based solely on a uniform policy. The court gave no consideration to the issue of whether an employer is in compliance by providing break opportunities but not requiring employees to take them, and did not differentiate between meal and rest claims.93
Two other class certification decisions are consistent with White, although they provide no specific analysis of the issue. In Bell v. Superior Court,94 the Second District affirmed denial of class certification on meal and rest break claims asserted by truck drivers, even though the court reversed denial of the overtime claim. It held that the employer's evidence that routes were scheduled to permit breaks, and that at least some drivers do take breaks, was sufficient to compel affirmance. It did not engage in any discussion of the provide/require issue but noted that the disputed evidence that drivers had the opportunity to take meal breaks constituted substantial evidence from which the trial court could infer "that any driver who did not take the necessary breaks did so for reasons which require independent adjudication."95
Similarly, in Blackwell v. SkyWest Airlines, Inc.,96 a federal district court denied class certification to airline ground agents asserting, inter alia, meal break claims. The court based its holding that the meal period claim "requires a highly individualized factual inquiry" on three facts: First, the employer had a patchwork quilt of time tracking systems that did not cover the entire class. Second, the employer permitted supervisors at different airports and duty stations to implement varying meal break policies. Third, there was evidence that some employees--including the class representative--"disobeyed oral directives from supervisors to take their meal breaks."97 Although the opinion does not contain any discussion of the provide/require issue, the latter point is consistent only with the conclusion that employers are not obliged to require employees to take meal breaks.