California employers are required to be in compliance with all local, state and federal labor laws. These laws generally hold employers strictly liable for violations. That means that ignorance of the law is not an excuse for non-compliance.
One of the best ways to avoid violating California employment laws is to learn about the most common claims that are prosecuted against employers in California. Knowing what to expect can help employers control their litigation risk and liability. Employers can make the right employment decisions and control their future.
What California Labor Laws are We Talking About?
The employment of workers in California is governed by a wide range of laws These include the California Constitution, the California Labor Code, 17 separate Industrial Welfare Commission Wage Orders, hundreds of city and county ordinances like the San Francisco Administrative Code, the Fair Employment and Housing Act, the Workers Compensation Act, the Unemployment Insurance Code and the California Family Rights Act. And, this is just a partial list.
California employment laws also are interpreted and clarified by courts and governmental agencies. These include the United States Supreme Court, the California Supreme Court, six California appellate districts, four federal district courts and the Ninth Circuit Court of Appeals. In addition, the California Division of Labor Standards Enforcement (“DLSE”) interprets California wage and hour laws and issues opinion letters on important wage issues. Federal employment laws governing California employees are contained in a wide range of complicated United States Code titles and Federal Regulations, as well. And, local laws, including living wage ordinances, are overseen by local agencies.
It is no wonder, then, that California employers frequently learn that they have violated one or more employment laws when they are served with a summons and complaint prepared by an employee’s attorneys.
What are Some of the Most Common California Labor Law Violations?
Although unlawful harassment and employment discrimination claims are not uncommon in California, compensation-related claims are extraordinarily common and they are the focus of this article. Those claims, commonly called “wage and hour” claims, involve a wide range of wage violations.
Based on more than 25 years of litigation experience in California, including 20 years engaged almost exclusively in employment law, here are four of the most common employment claims I have seen, prosecuted and defended.
Misclassification of Workers As “Independent Contractors”
The misclassification of workers as independent contractors is a significant problem in California. Last year the California Supreme Court ruled that for certain wage and hour purposes, a worker is deemed by law to be an employee unless the employer can establish the following things:
“(A) that the worker is free from the control and direction of the hirer in connection with the performance of the work, both under the contract for the performance of such work and in fact;
(B) that the worker performs work that is outside the usual course of the hiring entity’s business; and
(C) that the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hiring entity.”
This is the crux of the ABC Test announced in the April 2018 Dynamex Operations West, Inc. v. Superior Court decision.
In 2019 California passed Assembly Bill 5 (AB-5), which goes into effect on January 1, 2020. AB-5 codifies or cements into law the Dynamex decision. Although AB-5 has several carve outs for specific industries, the number of properly classified independent contractors has shrunken drastically and the number of employees has equally risen as a result of this new law.
An employee who has been misclassified as an independent contractor can assert a wide range of claims against the employer (including claims directly against the business owners and officers). Claim might be made on an individual basis, a class basis or a representative basis under California or federal law.
Typical claims arising out of the misclassification of an employee as an independent contractor include:
- Failure to Pay Minimum Wages;
- Failure to Pay Overtime Wages;
- Failure to Pay for Nonproductive Time under Labor Code § 226.2;
- Failure to Provide Rest Periods and Meal Periods;
- Record Keeping Violations (Labor Code § 226)
- Unlawful Deductions from Wages;
- Willful Failure to Pay All Wages Due Upon Termination; and
- Unfair Competition.
Most of these claims require the employer to pay the attorneys’ fees and costs of suit of the worker if the worker prevails on their wage and hour claims, adding to the financial impact of these claims on the employer.
Claims based on the misclassification of a worker as an independent contractor likely will increase over the next several years as employees are brought to task by workers for the violations that flow from the misclassification. In certain industries, like the fitness studio industry, I expect to see a number of class actions filed in the coming year. We filed a class action lawsuit against a San Francisco fitness studio based on these violations in September 2019. (See, Lock v. Full Wheel, LLC, et al.)
Misclassification of Workers as Exempt from Overtime
Even if a company gets the classification decision right with respect to whether the worker is an employee or independent contractor, it must decide whether the employee is entitled to overtime pay and other benefits provided to hourly employees.
Frequently, employers in California get this decision wrong. An “exempt” employee under California law may be paid on a salary basis, without overtime wages, without meal and rest periods, without certain record-keeping rights and without many of the other legal protections provided to non-exempt workers. Non-exempt employees, in contrast, may be paid on a salary basis if certain conditions are met.
But there are only five exemptions recognized in California: (1) the Executive Exemption; (2) the Administrative Exemption; (3) the Professional Exemption; (4) the Inside Salesperson Exemption; and (5) the Outside Salesperson Exemption. (Please see my blog about these exemption categories in my article, What Does it Mean to Be “Exempt” under California Labor Laws?)
In my experience, many employers do not have a clear understanding of the consequences of misclassifying an employee as exempt. In the San Francisco Bay Area, this lack of understanding seems particularly problematic among tech startups. Paying a worker a high salary does not render them exempt from overtime.
What a high salary accomplishes, however, is to ramp up the value of the claims that can be asserted by an allegedly misclassified employee. For example, the basic overtime rate for a misclassified employee earning $100,000 per year is $72.12 per hour. Under California law, the $100,000 salary paid to the misclassified employee is meant to cover 8 hours per day and 40 hours per week only. Any time worked over 8 hours in a day or 40 hours in a week is completely unpaid. Consequently, for every overtime hour worked, the employee is entitled to 1.5 times their regularly hourly rate. Ten hours of overtime per week in this example over the course of three years of employment could be as high as $108,000 in unpaid overtime!
Lawsuits based on an allegation of exemption status misclassification generally include the exact same claims made in independent contractor misclassification cases, including unpaid minimum and overtime wages, meal and rest period violations and so forth.
These cases can be very dangerous for employers and very attractive to dissatisfied employees and their attorneys.
Failure to Pay Wages for All Hours Worked
Claims by employees that they performed work without compensation for some period of time are very common. The factual basis for these “off-the-clock” claims is as varied as are workplaces across California.
For example, several years ago my office filed a state-wide class action against Polo Ralph Lauren alleging that Polo employees were required to wait up to 20 minutes a day after they had clocked out to undergo a loss prevention, or bag check, inspection by a store manager. We alleged the time they were forced to wait constituted unpaid work time for these employees. After trial in the Polo case, we followed up with another class action against Forever 21 that was based on the same off-the-clock work time allegations relating to bag checks.
In recent years, we also have prosecuted cases in the hair salon industry for similar off-the-clock violations, including a class action brought against a chain of hair salons in the Bay Area that settled for $1,000,000 in damages, penalties, fees and costs.
These wage claims generally include an allegation that the employer failed to pay the worker minimum wages for all hours worked, a claim which entitles the worker to double damages for unpaid and underpaid minimum wages. When the claim implicates overtime hours, these claims generally will include claims for unpaid overtime.
As with all of the claims discussed here, when a former employee brings wage and hour claims, they are also entitled to seek “waiting time penalties.” These penalties are permitted under Labor Code § 203 and can amount to 30 times the normal daily wage earned by the employee. For example, an employee working 8 hours per day at an hourly rate of $35 per hour would be entitled to up to $6,000 in waiting time penalties alone!
Failure to Pay Sales Commissions
“He who shakes the tree is the one to gather the fruit.” E. A. Strout W. Realty Agency, Inc. v. Lewis (1967) (Please see my article Commission Wages Due After Termination of Employment.)
An employee’s right to sales commissions is governed by the agreement between the employee and the employer. Under California Labor Code § 2751, all sales commission agreements must be in writing and must set forth the means by which the commission is calculated and paid.
If the commission agreement does not expressly and unambiguously state that commissions will be paid to the employee only if the employee remains employed when the commission is paid, an employee might be entitled to commissions even long after their employment has ended. Without such a forfeiture clause, for example, if a salesperson has performed all work required to make the sale and is merely waiting for the customer’s payment to be made, the salesperson is due wages when the payment is made, whether they still are employed or not.
Employers who fail to pay commission wages to an employee, either while they are employed or after they are no longer with their company, can face a wide range of claims, including contract claims and penalty claims. These claims can be difficult and expensive to defend because they often involve gathering evidence of the work performed by the employee on various deals. Sometimes these cases even require the parties to subpoena third-party customers who have knowledge of the work various people performed to bring a sale to completion.
A Quick Word About Class Actions
All of these kinds of claims may be brought as a class action if a sufficient number of similarly-situated employees were subjected to the same alleged violations. Contrary to common understanding, a class action in California does not require an employee to gather together a bunch of employees before commencing the lawsuit. That comes much later. Employment class action cases in California are “opt-out” cases, meaning that all employees are class members of a certified class unless they affirmatively opt out of the case.
Wage and hour class actions are very attractive to employment attorneys. They are interesting cases to manage. They are complex, sometimes filled with drama and often extremely valuable.
The risk of facing one of these kinds of wage and hour claims is significant, particularly in the San Francisco Bay Area. Avoiding these kinds of lawsuits should be a high priority of every employer, whether it has one employee or thousands. Many employers convince themselves that none of their dedicated employees would ever sue them. Many employers have discovered that they were wrong in their assessments of loyalty.
None of the claims discussed here is inevitable. Simple preventative steps can be made and must be taken by all good employers to ensure compliance with these labor laws. The consequence of non-compliance is too significant not to take these steps.
If you have questions about these common wage and hour claims, please reach out to Patrick Kitchin at email@example.com.