Exempt Status Employee: A Critical Requirement

May 28, 2013

In order to be properly classified as an exempt employee in California, the employee must spend the majority of his or her weekly work time performing exempt tasks. Thus, California’s test for exemption has a very quantitative focus, a focus that is materially different than the “primary duty” test under the federal FLSA. One question that commonly arises in lawsuits challenging exempt status of managers in California is whether time spent by those managers concurrently performing exempt and non-exempt tasks qualifies as exempt work for purposes of the quantitative analysis. Take, for example, a retail manager who assists customers during a rush but continues oversight of the store and coaching and direction of subordinate employees at the same time. Is such concurrent work exempt, non-exempt or both? Recently, a California court held that the work cannot be both exempt and non-exempt nor partial time credit given to the exempt and non-exempt sides of the ledger. Instead, the court held that the trier of fact must determine the “primary purpose” of the work and consider whether that primary purpose falls on the exempt or non-exempt side of the ledger.

In the Heyen case, the court’s analysis led to an adverse decision for the employer. The plaintiff, a grocery store manager, claimed she spent the majority of her time on non-exempt work (cashiering, etc.) instead of management duties. Following trial, the court found liability and awarded the plaintiff overtime compensation. The employer said that the trial court erred in failing to consider time spent by the plaintiff concurrently managing while performing non-exempt tasks. The appellate court found no error and held that based on the evidence, the trier of fact properly concluded that the work was for a primarily non-exempt purpose and thus, the employer did not get time credit for the employee’s concurrent management duties.

This case serves as a reminder to California employers about the need to carefully review exempt classifications to ensure that exempt employees truly spend the majority of their work time on exempt tasks.

If you have any questions regarding the exempt status, look on the IWC (Industrial Welfare Commission Order) posting that you should have with your other posters. If you have any questions, please call us.

How An Employee Can Lose Their Exempt Status

May 20, 2013

There has been a lot of litigation in California concerning the exempt status of various categories of employees, with plaintiffs’ attorneys filing class action after class action seeking to recover four plus years of overtime compensation stemming from employers allegedly misclassifying employees as exempt from overtime compensation. Typically, these claims are premised on an argument that the employees’ job duties (as opposed to the amount or manner of compensation paid to the employees) do not meet the test for exemption. A decision hand down today by a California Court of Appeal serves as a reminder that failure to pay exempt employees on a salary basis also destroys exempt status, even if the employees’ job duties satisfy the test for exemption.

In Negri v. Koning & Assoc., the plaintiff was an insurance adjuster who was paid $29 per hour for his work. He did not have any guaranteed and predetermined minimum salary that he would be paid regardless of hours worked. In actual practice, the plaintiff always worked at least 40 hours per week and was paid $29 per hour for each of those hours worked (and more if he worked more than 40 hours). Thus, the employee’s total compensation each week was far more than double the minimum wage (the minimum threshold amount of compensation to qualify for exempt status generally in California). Nonetheless, the employee sued his employer, claiming he was improperly classified as exempt and was owed overtime compensation. [He alleged he typically worked over 60 hours per week.] The employer argued the employee was properly classified as exempt based on his job duties and compensation. The trial court ruled in favor of the employer, citing federal authorities generally determining that insurance adjusters are exempt administrative employees. The employee appealed.

The appellate court reversed, but wisely did not want to touch the issue of whether the employee’s job duties met the test for the administrative exemption in California. [California courts have been all over the map on interpretation and application of the administrative exemption as to claims adjusters and as to many other categories of employees.] Instead, the court analyzed whether the employee’s compensation met the salary basis test necessary for exempt status. The court explained that payment on a salary basis requires that an employee be paid a guaranteed predetermined amount (of at least twice the minimum wage) that is not subject to reduction based on quantity or quality of work. The court held that the employer’s method of paying this employee did not meet this salary basis test because the employee was simply paid hourly without any guaranteed minimum salary. Thus, hypothetically, if the employee worked only a few hours in a week, his total compensation would be less than double the minimum wage because there was no guaranteed minimum salary in place. The employer argued that this hypothetical scenario never happened and that the employee always worked and was paid for at least 40 hours and so there was no “actual reduction” based on quantity worked. As such, the employer argued that the salary basis test was still satisfied as to this employee. The court disagreed and held that there must be a guaranteed minimum salary in place in order for an employee to be deemed paid on a salary basis and qualify for exempt status. The court clarified that it is permissible for an employer to pay an employee compensation over and above the guaranteed minimum without destroying exempt status, but there must at least be a guaranteed minimum in place in the first instance.

This case serves as a cautious reminder for employers who pay exempt employees using hourly forms of compensation. While this is generally permissible, there must be an agreement in place that the employee will receive a guaranteed minimum salary of at least double the minimum wage (California employees) for full-time employment. Otherwise, exempt status can be successfully challenged, with back overtime owed (typically at an alarming overtime rate given the higher rate of compensation paid to employees classified as exempt).

May 13, 2013

Employee Rights Poster to Join the Union Ruled Invalid!

Last week the D.C. Circuit Court of Appeals issued its ruling in a case brought by several employer groups seeking to challenge the legality of the NLRB rule requiring employers to post an employee rights poster informing employees of their rights under the NLRA to unionize, among other things. As employers will recall, the NLRB had postponed the effective date of the posting requirement several times pending various court challenges to the legality of the required poster. The NLRB then gained a victory before a District of Columbia district court, which held that the poster was lawful. Employer groups appealed to the D.C. Circuit Court of Appeals, which temporarily enjoined the NLRB from implementing the posting requirement until a ruling on the merits of the appeal. Last week, the Court of Appeals reversed the district court decision and held that the NLRB’s posting rule violated employers’ free speech rights and was, therefore, unlawful. For now, employers remain free of any obligation to post the NLRB employee rights poster.

The “Employee Tricked Me Into Firing Her” Defense

The NLRB continues to issue decisions about whether an employer can lawfully terminate employees based on social media activity, and whether workplace policies violate the law protecting employees’ rights to engage in protected concerted activity. However, last week’s decision in In re Design Technology Group, LLC had an interesting twist.

Three sales employees were discussing several work-related issues in person, and their discussion continued on Facebook. Among the complaints made were about how the store manager treated them and other store employees. The store manager later learned about the complaints, and subsequently fired the employees. At the hearing, the employer made much about the fact that the employees were “giggling and smiling” at the termination meeting, and that Facebook posts after the meeting suggested that the employees were happy to have been fired, and perhaps even set up the circumstances in order to get fired and sue the employer.

Adopting the ALJ’s decision, the NLRB was not persuaded by the employer’s defense:

The judge correctly rejected the Respondent’s ‘discharge conspiracy’ theory. The Respondent contends that the Facebook postings were not protected because the employees had ‘no honest and reasonable belief’ that the purpose of their conduct was for the mutual aid and protection of employees’ and that instead, the employees ‘schemed to entrap their employer into firing them.’ The judge found the conspiracy theory to be ‘nonsensical,’ and we agree. There is no credible evidence that the employees’ actions were undertaken to entrap the Respondent into committing an unfair labor practice. But even if the employees were acting in the hope that they would be discharged for their Facebook postings, the Respondent failed to establish that the employees’ actions were not protected by the Act.

Employer Take Away: What should you as an employer take away from this development?

The NLRB says that entrapment is not a valid defense to a proposed violation of employees’ rights to engage in protected concerted activity. That is, if the employees did engage in protected concerted activity under the National Labor Relations Act, it does not matter if they did so for the purpose of getting fired.

It remains to be seen whether an “entrapment”-like defense to these cases will gain any traction in later cases. For the time being, it would behoove you to focus less on the motives of the employees engaging in certain conduct, and more on whether the conduct itself is protected, before deciding to take some adverse action because of the conduct.

May 6, 2013

Minimum Wage Update!

California’s Legislature is considering AB10 this session, which would increase California’s minimum wage from the current $8 per hour to $8.25 per hour next year, to $8.75 per hour in 2015, and to $9.25 per hour in 2016. Beginning in 2017 and thereafter, the minimum wage would be automatically adjusted upward based on the state’s inflation rate. Recent legislative efforts to increase California’s minimum wage rate have failed and it is not clear whether this bill will fare differently. However, the bill did recently pass the Assembly Labor and Employment Committee. California’s minimum wage is already one of the highest in the country. Only a handful of states have minimum wage rates higher than California’s.

On the federal level, legislation has also been introduced to raise the federal minimum wage from the current $7.25 per hour to $8.20 per hour three months after the legislation is passed, to $9.15 per hour one year after the legislation is passed, and to $10.10 per hour two years after the legislation is passed. Starting the third year after the legislation is passed, the federal minimum wage would be automatically adjusted upward based on the Consumer Price Index. The federal legislation, known as the Fair Minimum Wage Act of 2013, would also increase the minimum wage for tipped employees over the next three years from $2.13 per hour to 70% of the minimum wage.

We will post developments on this and other employment-related legislation here.

Employer Hit With Unpaid Vacation Wages Even Though Union Agreed Vacation Was Properly Paid Under CBA

California employers should all be aware that California law requires employers to pay out all accrued, but unused, vacation pay immediately upon termination of employment. In other words, use it or lose it policies and/or policies that provide for forfeiture of vacation on termination of employment are illegal in California. Employers who fail to timely pay vacation wages on termination of employment are liable not only for the actual amount of unpaid vacation wages, but also for “waiting time penalties” of a full day’s regular wages for each day the payment is late, up to 30 days. There is, however, an exception to the rule prohibiting a forfeiture of vacation wages for unionized employees if the collective bargaining agreement “otherwise provides” (meaning it provides for something other than full payment of all vested vacation upon termination of employment). Recently, a California court interpreted this exception narrowly to hold that a collective bargaining agreement (“CBA”) must “clearly and unmistakably” specify that vested vacation does not need to be paid in order for a waiver to be found. In other words, an implied waiver or a waiver inferred from the totality of the circumstances (such as the past mutual practice of the union and the employer) is not good enough. The case is Choate v. Celite Corp..

In the Choate case, the employer granted its employees between one and five weeks of vacation annually. At the beginning of each year, the employer calculated the yearly vacation allotment based on an employee’s length of service and the number of hours the employee worked the year before. Under the CBA, employees terminated from employment were entitled to “receive whatever vacation allotment is due them upon separation.” Both the union and the employer understood this provision to mean that employees were entitled to be paid for the vacation time already allotted to them for the year of their termination, but not for any vacation time they had accrued toward the next year’s allotment by virtue of having performed a certain number of hours of work. The employer paid out vacation in accordance with this understanding. Notwithstanding the apparent agreement of the union and the employer as to the interpretation of the CBA’s vacation provision, a group of terminated employees sued for unpaid vacation wages and waiting time penalties.

The court held that the employer owed the pro rata vacation wages earned during the termination year because the CBA did not “clearly and unmistakably” waive employees’ right to receive those vacation wages. The court held that it was not sufficient that the union had for years agreed with the employer’s interpretation of the vacation provision. Although the court held that the vacation wages were owed, the court held that the employer did not owe waiting time penalties because the employer’s failure to pay was not “willful.” The court held that the employer reasonably believed that the wages were not owed based not only on the union’s agreement but also on conflicting case law, some of which suggested that an implied waiver standard was proper.

Employers with unionized employees who do not pay out all accrued, unused vacation on termination of employment should ensure that the applicable CBA clearly and unmistakably waives this entitlement.