San Francisco Employment Law Firm Blog

Most employers are well aware that if they terminate an employee for any reason of if it's a lay-off, they must pay that employee's wages (which includes vacation and sick time if applicable) in full immediately upon discharge. But, what if an employee works for a certain company on per assignment basis, where upon completion of one assignment of a certain duration, the employee might have to wait a shorter or a longer period of time till he receives the next assignment, where having such future work is not even guaranteed.

Recently, my client's employer tried to argue that because my client was expected to receive a new work project within a few months, they did not have to pay him his outstanding, accrued vacation time which accumulated to nearly 500 hours. The employee was out of work for several months, and there was no real assurance that the employer was going to put him on a new project.

At the labor board hearing in San Francisco, the commissioner was persuaded by my argument that under the California Supreme Court ruling in Smith v. Superior Court 39 C4th 77 (2006), "discharge" includes not only termination from ongoing employment relationship, but also release of an employee upon completion of a specified job assignment or time duration for which the employee was hired. In Smith the court determined that a fashion model, who was hired for one-day assignment, had to be paid at the end of that day.

There are a few exceptions to the above rule, the most notable of which is the fact that employees of temporary agencies who are placed to work as temps at a company, do not have to be paid immediately upon completion of assignment, because the very nature of working for a temp agency entails an agreement with such an agency to be paid as per the agency's payroll periods.

To qualify for the administrative exemption from overtime compensation requirement an employee must be primarily engaged in a work of a type that is "directly related to management polices or general business operations." This requirement of course must be interpreted as it is inherently vague. In one sense, every type of work directly relates to management policy because every employee does work that carries out, or is governed by, management policy. But for obvious reasons, such an interpretation wouldn't make sense, as it would make virtually all employee exempt from overtime.

In Harris v. Liberty Mutual Insurance Co. (2007), the court clarified that the work is "directly related to management policies or general business operations" for the purposes of determining whether administrative exemption applies only if it "relates to the administrative operations of a business as distinguished from 'production' or in a retail or service establishment 'sales" work." This means, the court continued, that only work performed at the level of policy or general operations can qualify as "directly related to management policies or general business operations." On the other hand, work that merely carries out the particular, day-to-day operations of the business is production and not administrative work, and thus doesn't qualify for administrative overtime exemption.

The Harris court, applying this analysis, found that insurance adjusters, who sued the defendant for unpaid overtime, were primarily engaged in "production" - adjusting individual claims for their employer. They investigate claims, make coverage determination, set reserves, negotiate settlements, make settlement recommendations for claims beyond their settlement authority, identify potential fraud, and so forth. Noe of that work was found to be carried out at the level of management policy or general operations. Rather, it is all part of the day-to-day operation of defendants' business.

The employer in Harris argued that the company's adjusters should be covered by administrative exemption from overtime compensation because they advise management on important decisions and participate in planning, negotiating and representing the company, which, according to Liberty Mutual, should have been considered administrative work. The court disagreed, holding that in order for such tasks to fall on the administrative side, they must be carried on at the level of policy or general operations as these were part of the employees' "routine day-to-day production work," comparable to that of a salespersons who negotiate prices and terms, represent the company, and purchase non-inventory products that customer requests.

The term "production" should not be taken literally when considering California administrative exemption from overtime compensation. For example, a law firm's product is legal advice and legal representation, not secretarial services. A secretary at a law firm therefore does not produce the firm's product as to do so would constitute providing unauthorized legal advice, and the secretary's work is a classic example of non-exempt production work, as it has nothing to do with policy or general operations (except in the sense that, like every employee's work, it is governed by policy). Rather, the secretary's work relates entirely to the day-to-day carrying on the firm's affairs.

In it recent decision, filed in November 6, 2008, the 9th Circuit clarified an important point of California Overtime Law. In that case, the issue was whether Oracle employees, who are not residents of California, are entitled to the protections and privileges of California overtime compensation laws, if they work in California. In its well reasoned decision, the court summarized California Labor Code section 510(a). The court reminded that this law requires overtime pay of one and one-half regular pay beyond 8 hours worked in any single day, 40 hours in one week, and the first 8 hours of work on the seventh day worked of any one workweek. Additionally it requires double pay for hours worked beyond 12 in a day or 8 hours on the seventh day of any one workweek.

California Supreme Court has concluded that California's employment laws govern all work performed within the state, regardless of the residence or domicile of the worker, citing Tidewater Marine Western Inc. v. Bradshaw 927 P.2d 296. That case held that California employment laws implicitly extend to employment occurring within California state law boundaries. Please feel free to read the full decision on California Overtime Law as it applies to non-residents of California.

Thus, this recent decision suggests that all employees who would otherwise qualify for overtime compensation, regardless of the state of their residence, are entitled to overtime compensation under California law, if they perform the work at issue within the territory of state of California.

One exemption from overtime compensation under Fair Labor Standards Act is known as the "Outside Salesperson Exemption." This exemption permits an employer to not pay overtime as otherwise required under California law, but only if a particular worker
(a) has the primary duty of (a) making “sales” or (b) obtaining orders or contracts for services or facilities usage, and
(b) is customarily and regularly engaged away from the employer’s place of business in performing such primary duty.

The information above can be found at 29 USC § 213(a)(1) and 29 C.F.R. § 541.500. In order to qualify for this exemption under California law, however, the employee must spend more than 50% of his/her working time performing truly-exempt sales functions away from the employer’s business establishment (or away from the employee’s home, if that is where the employee is normally based).

Another commonly applied overtime exemption applies to primarily commission-based salespeople. Section 7(i) of the Fair Labor Standards Act (29 USC § 207[i]) will exempt a particular employee from overtime compensation if:
(a) the employee is employed in a “retail or service establishment,” and
(b) the employee’s regular rate of pay exceeds one and one-half times the applicable minimum wage, and
(c) more than half the employee’s compensation for a representative period represents commissions on goods or services.

Note that the “regular rate of pay” language, referenced in the above federal test, applies on a workweek basis. This means that the average of compensation for two or more weeks does not satisfy this requirement.

If you have any questions about overtime or your rate of compensation in California, contact San Francisco employment lawyer Arkady Itkin to address your concerns about wages.

Under FLSA an employee will be considered to be paid on a "salary basis" and thus exempt for the purposes of overtime compensation, if the employee regularly receives each pay period on a weekly, or less frequent basis, a predetermined amount constituting all of part of the employee's compensation, which amount is not subject to reduction because of variations in the quality or quantity of the work performed. 29 C.F.R. section 541.602(b)(1)(2004). Employees must also be paid a specified minimum salary in order to qualify as exempt.

The effect and the reason behind those provisions is to prevent employers from docking the pay of an employee for an absence of less than a day (partial day absence). In other words, the employer should only deduct pay for one day absences or longer. Thus, if an exempt employee takes a few hours off, that should not be deducted from pay. If an employee takes one day and a half off, the employer, with a small number of exceptions, can only deduct one day from that pay period. If the employer makes partial day deductions, then the employees subject to those deductions do not meet the salary basis test, and are non-exempt for the purposes of overtime pay.

Thus, an employer should be very careful with partial day deductions against exempt employees' pay, as classifying employees as "salaried exempt" while docking their pay for partial day absences will likely subject an employer to liability for failure to pay overtime compensation for at least the entire time that the policy of partial day deductions has been in place.

The Supreme Court has held that time spent waiting for work is compensable if the waiting time is spent "primarily for the benefit of the employer and his business." Armour & Co. v. Wantock (1944). Whether the time spent predominantly for the employer's benefit depends on the specific circumstances of each situation. Although there is no hard and fast rule, the cases dealing with the question of compensation and overtime for on-call duty consider two major factors: (1) the degree to which the employee is free to engage in personal activities; and (2) the agreement between the parties.

While the second factor - the existence or non existence of the agreement to waive on-call duty compensation - is usually easy to determine, the first factor includes sub-elements that determine whether the employee is free to engage in personal activities while on call: (a)whether there was an on-premises living requirement; (b) whether there were restrictions on employee's travel during on-call duty; (c) whether the frequency of calls was so high that it prevented employee from engaging in typical off-duty activities of a person; (d) whether a fixed time limit for response was unduly restrictive; (e) whether the employee could easily trade on-call responsibilities; (f) whether employee actually engaged in personal activities during call-in time.

The above list is not exhaustive but merely illustrative.

Thus, the underlying principle of determining whether compensation for on-call duty is due is looking into the specific details and the frequency of the duties of the on-call employee and how much their restrict his ability to enjoy his hours off work.

Under Federal Law

Federal law exempts certain employees from both minimum wage and overtime pay requirements. These exemptions include:

* Workers employed in a bona fide executive, administrative or professional capacity;
* A list of certain other employees, including outside salespersons, amusement park/recreational employees, agricultural employees, newspaper business employees, switchboard operators, seamen, criminal investigators, computers systems analysis, and baby-sitters and personal attendants.

Further, under Federal law, certain employees are subject to special provisions regarding maximum hours worked without overtime compensation.

Under California Law

Under State law, three groups of employees are exempt from some of the state law requirements. The first two groups are exempt from both overtime and minimum wage requirements. These groups are:

* Executive, administrative, professional ("white color") emlpoyees; and
* Other employees: state and local government employees, members of employer's families, employees licensed under the Fish and Game Code, live-in employees in substance abuse alternative housing, students nurses, and carnival ride operators.

Overtime and Collective Bargaining Agreement

Under California Labor Code section 514, State overtime law does not apply to employees covered by a collective bargaining agreement that provides and hourly rate of at least 30% higher than the minimum wages and "premium" wage rates for overtime work.

An employer may not deduct from employee's wages moneys lost due to ordinary losses, such as cash shortages, breakage or loss of equipment, etc.) in the absence of showing of dishonesty, willful acts or gross negligence. As the court noted, the law prevents the employer from using wages to shirt business losses to employees, or to make employees insurers of such losses. (Prachasaisoradej v. Ralphs Grocery Co., Inc.)

An employer who resorts to "self-help" in deducting wages of his employees for ordinary losses does so at his own risk. If the employee is found not to have engaged in a dishonest, willful or grossly negligent act, the employee will be entitled to recover the amount of wages withheld, plus any waiting time penalties due.

The above rule applies seems to apply to non-exempt employees only. There is no prohibition on deductions from the earnings of exempt (management level) employees, many of whom work on incentive plans entitling them to a share of profits. Their incentive plan computation of profits properly includes a full range of revenue and expense items, including cash and inventory shortages.

Further, the prohibition on deducting business losses from employees' earnings only applies to "wages." "Wages" includes sales commissions or bonuses based on the employee's individual performance. The prohibition on employer deductions does not apply to payments under an "incentive plan" that is supplementary to regular wages and rewards a group of employees for their collective performance, and is based on the employer's profits.

The executive exemption that relieves employers from the obligation to pay overtime compensation applies to any employee:

* Whose duties and responsibilities involve the management of the enterprise in which he is employed or of a customarily recognized department of subdivision of that enterprise;
* Who customarily and regularly directs the work of two or more other employees in that enterprise;
* Who has the authority to hire or fie other employees or whose suggestions and recommendations as to the hiring, firing, advancement, promotion, or any other change of the status of other employees will be given particular weight;
* Who customarily and regularly exercises discretionary powers; and
* Who is "primarily engaged" in duties that meet the test of the exemption.

"Primarily engaged" means that more than one-half of the employee's work time must be spent engaged in exempt work.

In the ever increasing occurrence of mergers, dissolutions and restructuring of businesses it is not uncommon for an employee to face a situation where he/she is owed wages for work performed, but these wages are unpaid because the entity that purchases the original employer is not willing to pay the wages due or is unable to pay compensation because of dissolution, bankruptcy and/or claims of creditors who argue that they have priority in repayment over other claimants.

Under the circumstances where the assets of a company are sold or transferred, employees may have a priority lien over other creditors for the proceeds of the sale or transfer of assets of a company under California Civil Code section 1205. Under that section all wages earned during the 90 days prior to corporate dissolution or other "not ordinary" business event have priority over virtually all other claims and must be paid first from the proceeds of the sale and transfer. One court noted that wage earners will prevail over other statutory lien holders, including secured creditors such as mortgage lien holders (Myzer v. Emark Corporation (1996)).

In 2007, the California Supreme Court addressed the issue of reimbursement of mileage expenses incurred by traveling employees under California Labor Code 2802 in the case of Gattuso v. Harte-Hanks Shoppers, Inc. The court held that when calculating costs that an employee incurred using his or her automobile, for purpose of statute requiring employers to indemnify employees for costs necessarily incurred in discharge of their duties, use of mileage is permissible, even though it is less accurate than calculating actual expenses incurred. But if employee can show that reimbursement by mileage is less than actual expenses, the employer must make up the difference.

In calculating reimbursement amount due to employee under the labor code section 2802, the employer may consider not only actual expenses that employee incurred, but also whether each of those expenses was "necessary," which in turn depends on the reasonableness of employee's choices.

Thus, the employer will probably not be obligated to reimburse employee for lavish or extravagant expenses such as five-star hotels, extravagant dinners, etc.

Under California Labor Code section 221, an employer may not take back any wages from an employee after they are earned. The statute provides: "It shall be unlawful for any employer to collect or receive from an employee any part of wages theretofore paid by said employer to said employee." The labor code section 200 defines wages broadly to include "all amounts for labor performed by employees of every description, whether the amount is fixed or ascertained by the standard of time, task, piece, commission basis, or other method of calculation. The statute illustrated California's strong public policy favoring the protection of employee's wages.

Some employers and especially retailers have the "chargeback" policy under which the employees' incentive that is to be paid, is charged back if the consumer of the products/services returns the purchased product to the store. It is important to note that such a policy is only valid and legal if agreed upon by an employee in writing. If the worker does not expressly agree to the chargeback policy in writing, it will likely be found to be unlawful.

Under California Labor Code section 510(a), all employees who work in excess of 40 hours in one workday or in excess of 8 hours per day must receive overtime pay. This provision, however, doesn't apply to any employee "whose earnings exceed one and a half time of the minimum wage if more than half of that employee's compensation represents commissions." (California Code of Regulations, title 8, section 11040, subdivision 3(D)).

It is important to understand which compensation exactly is considered commissions for the purposes of the issue in question. A commission is a compensation paid for services rendered in the sale of property and services, and based proportionately upon the amount of the value of the services rendered. Under the Supreme Court definition, the compensation is commissions if (1) the employee receiving compensation is involved in selling a product or a service; (2) the amount of compensation in question is a percent of the price of the product or service." (Ramirez v. Yosemite Water Co. (1999)).

Thus, if, for instance, the employer's "bonus" or "incentive" pay does not depend on the volume of products/services sold by an employee, the overtime protections laws probably apply to that employee.

Under California law (California labor code section 501), an employer can authorize alternative workweeks of workdays exceeding eight hours without overtime pay if specified criteria are met. Such flexible scheduling requires full disclosure to affected employees and the affirmative vote of at least two-thirds of the employees in the affected workplace voting in a secret ballot election before performance of the week.

Any type of alternative schedule that is authorized by Cal. labor code section 501 may be repealed by the affected employees. An employer shall not reduce an employee's regular rate of hourly pay as a result of the adoption repeal or nullification of an alternative week schedule.

However, the employer must pay overtime at one-and-a-half times the regular rate after 10 hours per day in a 40 hour workweek, and a double the regular rate after 12 hour per days and for any work in excess of eight hours on those days worked beyond the regularly scheduled alternative workweek days.

Thus, if, for example, the alternative workweek is 3 12-hour workdays per week, the employees on that schedule must be paid overtime at 150% of their regular rate for the two hours per day, exceeding the ten-hour limit on each workday.

What is a tip?

A tip (or gratuity) is the money that a customer leaves an employee over the actual amount due for the goods or services received. This tip money belongs to the employee, not the employer.

Is it legal for my employer to deduct my tips from my paycheck?

No. Your employer cannot take your tips (or any part of them), and cannot deduct money from your pay because of the tips your earn. Your employer also cannot credit the amount of your tips against the money he owes you. You do not have to pay back your tips to your employer with one exception that is explained below.

When a customer pays with credit card, my employer deducts the credit card company’s fees from the tips they leave. Is this legal?

No. Since the employer has chose to use the services of the credit card company, the employer must pay that cost. The fee is a cost of doing business for your employer that he cannot shift to you.

I made an agreement with my employer that he can deduct my tip money from my check. Is this allowed?

No. An employer cannot get around any of the laws mentioned above by getting an employer to agree to a deduction. Like many other employment related matters, many laws and rules, especially the ones that concern public policy, preempt and trump any private agreements at work place. This includes most of the tip pooling laws.

My employer pays me less than minimum wage because he includes my tips in my hourly pay. Is this legal?

No. Although some states allows employers to pay tipped employees less, California requires that they be paid minimum wage, a calculation of which does not include tips.

I was told to share my tips with other employees, even though I am the one receiving tips directly from customers. Do I have to share my tips?

Sharing tips with other employees is called “tip pooling” or “tipping out” and is usually legal if it is common in your trade (e.g. restaurant workers). Since tips belong to the employees who helped “serving the customer,” and sometimes more than one employee “serves” a customer (e.g. cooks, bussers, and waiters all make sure that the customer gets good service), it is OK for your employer to force you to share tips with those other employees that help. As long as you only share tips with employees who somehow help the customer, and not supervisors or managers, forced tipping out is legal. However, the tip pooling arrangement must be reasonable. If you have to tip out too much to other employees, the arrangement may not be legal. For example, it is usual in the restaurant business for a waitress to tip out 15-20% to other employees, so this arrangement is almost certainly reasonable. On the other hand, if a waitress has to give up 60% of the tips she collects to other employees, this arrangement is probably not legal.

Are all employees who receive tips protected?

Yes, with one exception. If an employee provides a service for customers but the business doesn’t charge for that service, the employee may have to pay her tips back to her employers. Examples are a valet parking attendant who parks cars for a restaurant and a coat checker in a theater where the customer is not charged for the service. The employer must still pay minimum wage, and the employee must be paid her wage or salary in full, even if the tips collected are not enough to cover the employee’s wages or salary.