Current Issues in Wage/Hour Law for California Employers: Avoiding Employee Disputes and Compliance Pitfalls

California employers today face few greater risks in their complex relationships with employees than those they encounter in complying with the often bewildering web of federal and state wage and hour laws. Large employers can find penalties for otherwise small violations or claims for unpaid wages multiplying perhaps 100-fold or even 1,000-fold, as wage and hour claims often accrue on a per employee, per day basis.

Small and mid-sized companies have no safe harbor in this storm, as there is no "small employer exemption" to most state or federal wage and hour laws.

Wage and Hour Compliance: Unique Exposure Risks

Wage and hour compliance also presents a unique kind of exposure risk to the employer, who must be concerned not only about claims brought by employees and former employees, but about compliance investigations and potential penalties assessed by California and federal administrative agencies charged with wage and hour law enforcement.

Employee claims alone can take any of several forms, as employees have more than one enforcement mechanism available to them in claims for unpaid wages. Not only may employees bring conventional civil lawsuits, they may also bring administrative claims for unpaid wages and penalties before California's Division of Labor Standards Enforcement ("DLSE"), which is empowered to hear claims and enter judgments for unpaid wages and related penalties involving a broad range of wage and hour matters.

Employees may, and often do, bring wage and hour claims before the DLSE without the services of an attorney, giving them a cheap and relatively efficient path to a potential recovery. Accumulated day by day and pay period by pay period, wage and hour violations by an employer can become a "silent killer," as unpaid wages and related penalties can accrue up to a limitations period ranging from 3 to 4 years, depending on the type of claim brought against an employer.

Compliance with Federal and State Law

As if having to comply with one complex set of wage and hour laws were not enough, California employers must also remember that they are required to comply with both federal wage and hour law, and with the state's own separate complex wage and hour laws and regulations. While these two bodies of law are often similar to each other, they contain important differences, and can even present an employer with seemingly conflicting compliance obligations.

For instance, California law allows employers to offer "comp" time in lieu of overtime; federal law does not. Because federal wage and hour law does not "preempt" state law on the same subject, California employers are required to follow the applicable legal provision most favorable to employees in any given situation.

Increase in Wage and Hour Litigation

The symptoms of employers' challenges in complying with the overlapping maze of federal and state wage and hour laws can be readily seen in the recent years' explosion of wage and hour litigation in state and federal courts in California.

Classification of employees as either "exempt" or "non-exempt" from overtime compensation obligations has proved the most troublesome area for employers, but litigation has more recently been spreading to embrace other aspects of wage and hour law, such as mandatory meal and rest breaks for non-exempt employees.

Often brought as class action lawsuits by one or a small group of employees on behalf of all "similarly situated" current and former employees, complaints seeking unpaid overtime compensation and related penalties have yielded staggering settlements and verdicts against California employers in recent years.

"Labor Code Private Attorney General's Act"

Worse still, Labor Code Sections 2698- 2699.5, entitled the "Labor Code Private Attorney General's Act" allows "aggrieved employees to bring civil actions" to recover penalties available under the Labor Code, on behalf of both themselves and any other similarly situated employee. For all these reasons, there is perhaps no greater field within employment law where an employer needs more urgently to practice "preventive law."

Exempt and Non-Exempt Classification

Both in the amount of potential legal exposure and in the complexity of making a legally defensible decision, employer classification of employees as "exempt" or "non-exempt" from overtime compensation and other wage and hour obligations is a California employer's greatest current challenge in wage and hour compliance.

"Classification" refers to the decision an employer must make to determine whether an employee will be legally entitled to overtime compensation, and to other "non-exempt" employee rights such as meal and rest break periods, or whether the employee will be "exempt" from these requirements.

Definition of "Exempt"

An "exempt" employee is exempt at least from the requirement to be paid overtime compensation for hours worked over 8 in one day and 40 in one week. Depending on the particular exemption involved, such an employee may also be exempt from other employer requirements imposed by federal and California law, such as minimum wage and record keeping obligations.

Both federal and California law create a number of specific "exemptions," but the provisions of federal and California law often conflict with one another in describing the requirements necessary for an employee to qualify for a particular exemption.

"White Collar" Exemptions

While there are many more exemptions from federal and state wage and hour laws than can be covered here, the most widely used by far are the so-called "white collar" exemptions. These three exemptions, often referred to as the "executive," "professional," and "administrative," exist in both federal and California law (though the requirements differ between the two) and are the three exemptions most commonly relied on by employers. Some requirements are common to each of these three "white collar" exemptions, whether under California or federal law.

Actual Job Duties Matter

First, it is always the case that a job title is irrelevant to whether a position is "exempt." What matters instead is the employee's actual job duties. Creating a promotion path for employees by adding "manager" to their job titles, without concurrent and significant changes in the actual job duties they perform, is an example of one wage and hour law "trap" to which small employers are especially susceptible.

If an employee's ascension to "manager" status comes with a change from hourly to salary compensation, and a cessation of overtime compensation by the employer, but the employee continues to perform the same duties he or she performed as a non-exempt employee, the employer may begin to accrue significant liability for unpaid overtime compensation as a result of "misclassifying" the employee as exempt.

On the issue of hourly versus salary compensation, it is true, so far as it goes, that exempt status requires an employee to be compensated on a "salary basis." However, paying an employee a salary rather than an hourly wage does not in and of itself make the employee exempt. Again, it is the actual job duties performed by an employee in the position at issue which control the decision to classify the position as exempt or non-exempt.

Under current California law, an exempt employee must receive a minimum monthly salary equal to at least twice the minimum wage. At California's current minimum wage of $10.50 per hour, which will increase to $15.00 by 2023, that means an exempt employee must receive a salary of at least $3,360 per month currently and $4,800 in 2023, in order to qualify as exempt. (Note that this amount will increase, as California's hourly minimum wage increases .)

Discretion and Independent Judgment Requirement

Also, in each of the "white collar" exemptions, an exempt employee must "customarily and regularly exercise discretion and independent judgment." Perhaps recognizing that "discretion and independent judgment" does not provide employers with a clear standard for making classification decisions, regulators have tried to elaborate on the degree of "discretion and independent judgment" necessary to qualify for exempt status.

California's requirement is that an exempt employee must exercise discretion and independent judgment in "matters of consequence" of "real and substantial significance to policies or general business operations."Unfortunately for employers, these additional phrases do little to help an employer understand just where to draw the line in the process of classifying an employee.

As a result, the "discretion and independent judgment" element of each of the "white collar" exemptions has been one of the most heavily litigated, with an employee often claiming his or her duties involved little or no discretion, and employers responding the employee was vested with significant responsibility to use his or her judgment.

Exempt Duties Requirement

Another important concept for employers to understand (and one of many important differences between federal and California wage and hour laws), is that California employees must be "primarily engaged in" exempt duties to attain exempt status.

Unlike federal law, which looks to the nature of an employee's " primary duties," California requires that at least 50% of an employees working hours be spent in duties which are classified as exempt.

This means that even where an employee's "primary duty" may involve exempt tasks such as managing, planning or analyzing, a California employee who spends more than 50% of his or her working hours in non-exempt activities such as routine clerical work or selling, will be considered under California law to be non-exempt.

With this background common to each of the "white collar" exemptions in mind, some additional requirements unique to each specific exemption can be explored.

Executive or Managerial Exemption

For an employee to be considered exempt from overtime compensation and other wage and hour requirements as a "manager" or "executive," his or her duties must involve the "management of the enterprise or a customarily recognized department within the enterprise." Importantly, an exempt manager must customarily direct the work of at least 2 or more other employees.

This means an employee referred to by the employer as the "manager" of a small office or department, but who customarily has only one other employee under his or her supervision, will not qualify for wage and hour exemption as a manager.

Also, an exempt manager must have the authority either to hire or fire other employees, or to make recommendations which carry significant weight as to who will be hired or fired. Examples of exempt duties performed by employees classified as "managers" include interviewing, hiring, training, directing, evaluating, disciplining, and planning.

By comparison, duties considered to be non-exempt would include: performing the same work as subordinates, production work, selling, stocking, routine clerical duties, inspecting, and maintenance. Under California law, to be properly classified as an exempt "manager," an employee must spend over 50% of his or her working hours performing exempt duties.

Professional Exemption

California law provides that those employees who are state licensed or certified and primarily engaged in the practice of law, medicine, accounting, teaching, optometry, architecture, engineering, and dentistry may be considered exempt professionals. Importantly however, California law does not automatically consider paralegals and nurses to be exempt professionals, and with respect to accounting professionals only includes certified public accountants within the professional exemption.

Engineers who may be exempt under this exemption include only licensed civil, mechanical or electrical engineers, and the professional exemption for the dental profession excludes most dental hygienists.

There is an alternative (though much less clearly defined) path to status as an exempt professional under California law for those who work in jobs which can be classified as a "learned or artistic profession."

Qualification for exempt status under this subset of the professional exemption requires that the employee have completed a prolonged course of specialized intellectual instruction and study, and perform work which is original and creative in character in a recognized field of artistic endeavor.

Learned and artistic professionals must also perform work which is predominately intellectual and varied in character and cannot be standardized in relation to a given period of time.

Administrative Exemption

Perhaps the most widely used and at the same time the least understood "white collar" exemption is the "administrative" exemption. Many employers rely on this exemption to classify a wide range of office workers as exempt from overtime compensation and other wage and hour requirements.

Unfortunately, in spite of its attractively broad and inclusive title, the administrative exemption is construed much more narrowly than its name would suggest. Combining an alluringly broad label with the requirements less clearly understood than any other "white collar" exemption, the administrative exemption can prove to be a very easy trap for an employer to fall into when deciding how to classify an employee's job duties.

For starters, an exempt administrative employee (working for an employer other than a school system) must perform office or non-manual work "directly related to management policies or business operations of the company or its customers."

In addition to the usual "discretion and independent judgment" required for an exempt employee, the employee must also regularly and directly assist a proprietor or another employee who is employed in a bona fide executive or administrative capacity, or perform, under general supervision, specialized work or work requiring special training, experience, or knowledge.

Duties considered to be exempt when performed by an administrative employee include: advising management, planning, negotiating, purchasing, research, analysis, and policy making. Non-exempt duties include routine clerical duties, deliveries, equipment operation, inspection, and tabulating data.

In interpreting the obtuse phrases on which the administrative exemption relies, it is critically important for employers to understand the view of both federal and California regulators that so-called "production work" is not exempt administrative work.

Expanding on a concept also found in federal regulations, California wage and hour law takes the position that those employees who are primarily engaged in producing either the product or the service that a particular company exists to produce are, in effect, "production" employees, who may not be classified as exempt under the administrative exemption because they are not performing work "directly related to management policies or business operations of the company."

This view can probably be traced to the fact that wage and hour laws were principally written during the 1940's, when the United States economy mainly involved employment in manufacturing industries. In a factory setting, exempt administrative employees were seen as those who performed in-house "staff" work, not related to the company's production efforts, but to supporting the company's internal operations.

Internal staff functions such as personnel, buying and purchasing, and analysis, were not considered to be production work, and were among those originally intended to be covered by the administrative exemption.

The Modern Service Economy

Applying these 50-year old rules to our modern service economy, however, can bring serious consequences for employers relying on the administrative exemption to shield them from overtime compensation requirements. In the case of, Bell v. Farmers Interinsurance Exchange, 87 Cal. App. 4th 805 (2001), rev. denied 2001 Cal. LEXIS 4231; cert. denied 534 U.S. 1041 (2001), a California Court of Appeal applied this "production work" concept to insurance adjustors working for a subsidiary of Farmers Insurance.

Finding that (at least under the facts of this case) the employees were principally involved in delivering the product their employer existed to deliver—insurance claims adjusting services—the court found that these otherwise "white collar" insurance employees were nonetheless non-exempt "production workers" entitled to overtime compensation.

Other Exemptions

Beyond the three traditional "white collar" exemptions, California employers should at least be familiar with three additional exemptions which apply to certain specialized categories of employees.

Computer Professional Exemption

One additional exemption available to California employers is the relatively recent "Computer Professional Exemption." This exemption is available under both federal and California law, but California law places greater restrictions on the exemption's availability. Under the

California Computer Professional exemption, an employee may be exempt if he or she is involved in duties including application of systems analysis techniques and procedures to determine hardware, software, or functional specifications.

Exempt computer professionals may also be involved in the design, development, documentation, analysis, creation, testing, or modification of computer systems or programs based on user or design specifications.

An employee may also qualify under this exemption if he or she is involved in documentation, testing, creation, or modification of computer programs related to design of software or hardware for computer operating systems.

Both California and federal law require that exempt computer professionals be "highly skilled and proficient" but critically, under California law, an exempt computer professional must be paid at least $42.35 per hour, significantly more than the $27.63 per hour required to qualify for the exemption under federal law.

This also points out an important distinction between the Computer Professional exemption and the traditional "white collar" exemptions, as exempt computer professionals may retain their exempt status while being paid on an hourly basis.

List of Disqualifiers

In an effort to narrow the number of employees who might qualify for this exemption, California law also provides a list of "disqualifiers" which will prevent an employee from achieving exempt status. Among these are trainees or entry level employees who are still learning to become proficient, as well as those who have not yet attained the skill level and expertise necessary to work independently and without close supervision.

Also disqualified from exempt status under California law are those who are engaged in operation, manufacture, repair, or maintenance of computer hardware, as well as engineers, drafters, machinists or other professionals whose work includes the use of computers or computer assisted design but who are not in a computer systems analysis or programming occupation.

Likewise excluded are writers of material related to computers for print or on-screen media, or who write or provide content material for computer related media, as well as employees who create imagery for effects in television and movies.

Salesperson Exemptions

Certain sales people may also qualify for exempt status under California and federal law. So called "outside" sales people may be classified as exempt if they are 18 years of age or older, and spend more than 50% of their working time away from the employer's place of business, engaged in selling tangible or intangible items, or obtaining orders or contracts for products, services, or use of facilities.

For an employee properly qualified as exempt under the outside salesperson exemption there is no minimum salary requirement, as it is often the case that these employees are compensated on a commission basis.

Also available, though far more complicated for employers to apply, is a limited exemption for so called "inside" sales people. In general, this exemption requires that during any work week an employee who works in "inside sales" may be exempt from overtime compensation requirements if he or she is paid at least one and one-half times the California minimum wage, and more than 50% of the employee's total compensation for a representative period of at least one month is from commissions.

Because of the way the terms "representative period" and "commissions" are defined under California law, it is important for an employer interested in making use of the inside sales exemption to carefully review its requirements.

This exemption is another example of the important differences between federal and California law. The federal exemption applicable to inside salespeople is limited to those employees who work in the "retail and service industry."

A considerable body of quite dated federal regulations struggles to define what kinds of businesses may qualify as "retail and service establishments." However (as is the case with much of wage and hour law), the 1940's-vintage regulations do not address many modern types of businesses which have evolved since the regulations were first written.

The parallel California exemption for inside salespeople is somewhat broader in its application, and is available to all employees working in "professional, technical, clerical, mechanical and similar occupations," as well as in the "mercantile industry."

Significant caution should be exercised by employers seeking to use the inside sales exemption, however, as the differences between federal and California law may result in an employee being exempt under one set of laws but non-exempt under the other. Under

California's inside sales exemption, for instance, an exempt employee is "exempt" only from the overtime compensation requirement and not from other aspects of wage and hour law obligations such as record keeping requirements, and meal or rest break period requirements.

Furthermore, unlike the "white collar" exemptions (which are based on the employee's duties and need only be reviewed from time-to-time as the employees duties may change), an inside sales person's exempt status depends on his or her compensation from week to week. This means an inside salesperson may qualify for overtime exemption in one week, but not the next.

Meal and Rest Break Periods

Another aspect of California wage and hour law which differs in important ways from federal law is the requirement that all non-exempt employees (as well as those classified under limited exemptions such as inside sales) receive daily meal and rest break periods.

The requirement for a daily meal period is not waivable under most circumstances. A qualifying employee must be provided at least thirty minutes for every work period of more than five hours as an unpaid meal period, with a second meal period for workdays exceeding ten hours.

During this meal period, the employee must be relieved of all duties, and free to leave the premises. If these requirements are met, the meal period may be unpaid.

California's Division of Labor Standards and Enforcement has taken the position that the meal period must begin no later than five hours after the employee begins his or her day's work. This can make for significant complications with employers who offer flexible schedules or overlapping shifts.

For instance, an employee who begins work at 5:30 a.m. would have to be provided his or her "lunch" no later than 10:30 a.m. for the meal period to be considered in compliance with the law by the DLSE. California law places the responsibility to assure that the employee takes the meal period squarely on the employer.

The meal period may be voluntarily waived by an employee if the day's work will be complete in six hours or less. While there is no requirement that that waiver be in writing, it would certainly be prudent for the employer to obtain some written record that the employee agreed. California law does permit an "on-duty" meal period, but only when "the nature of the work" leaves no alternative.

While this phrase is open to interpretation, employees who are, for example, engaged in operating continuously running machinery, such as printing presses, should arguably have the "nature of work" which would require an on-duty meal period. When an on-duty meal period is offered, the meal period must be paid, and must also be pursuant to a written agreement which can be revoked at any time by the employee.

Rest Breaks Under California Law

A similar requirement exists with respect to rest breaks, which must also be provided to all non-exempt employees (and other qualifying employees such as inside salespersons) at the rate of ten minutes for each four hour period worked, or "major portion" thereof (i.e.—any work period of two hours or more requires a rest break). Unlike meal periods, rest breaks are paid as time worked, and the employee may be required to remain on the premises.

Penalties for Failure to Comply

The significant risk to an employer in failing to comply with California's meal and rest period requirements is found in California Labor Code § 226.7, which establishes a penalty of one hour's wages for every day in which the employer fails to provide a meal period in compliance with the requirements of California law, and an additional hour's wages for every day in which a rest period is not provided.

While a maximum of one hour's additional wages would be owed whether the employee missed one or two rest breaks, the rest break penalty can be added to the meal break penalty so that an employee who misses a meal period and a rest period in the same work day would conceivably be owed two additional hour's wages for that day.

The difficulty in record keeping, and in policing employees to assure they take meals and rest periods that they may otherwise voluntarily choose to forego, can lead to lapses in vigilance and subsequently to significant employer liability.

Class action cases alleging failure to provide meals and rest periods are beginning to appear, as the prospect of collecting an additional one or two hour's wages for each employee for each day, together with applicable penalties, interest and attorney's fees, has become a new and attractive litigation strategy for plaintiff's attorneys.

Other Frequent Wage and Hour Issues

Decisions about overtime compensation exemptions, though among the most difficult aspects of wage and hour compliance, are by no means the only challenge. Other traps for the unwary employer under California wage and hour law include decisions to classify workers as "independent contractors," rather than as employees.

Independent contractor status appears to offer an employer a number of advantages, but on close examination, the decision to engage a worker as an independent contractor also comes with significant risks.

California enforcement authorities view employer classification of a worker as an independent contractor with a degree of suspicion, since such a classification results in the employer not withholding taxes from the worker's pay, and in a different legal relationship between the worker and the employer which is in many ways more favorable to the employer.

Limits on Ability to Classify

California law places limits on an employer's ability to classify workers as independent contractors by setting out multi-factor tests to determine whether or not an "independent contractor" is really an employee in disguise. In deciding whether a worker is properly classified as an independent contractor, California law looks to factors including:

  • the worker's opportunity for profit or loss depending on his or her management of his work,

  • the worker's investment in equipment or materials required for his or her tasks,

  • the worker's employment of helpers,

  • whether the services rendered required a specific skill,

  • the degree of permanence of the working relationship, and

  • whether the service rendered is an integral part of the company's business.

An employer's decision to classify a worker as an independent contractor should only be made on a case-by-case basis, with a careful eye on the legal standards involved, because the penalties for incorrectly classifying a worker as an independent contractor and later having a California enforcement agency rule that the worker was, in fact, an employee can be very significant.

Additionally, employers are required under California law to report the engagement of an independent contractor to the California Employment Development Department, using Form DE542. Additional information on the independent contractor reporting requirement can be found on the EDD's website.

A close cousin of the overtime compensation issue is the notion of compensatory, or "comp," time. Strange but true, so called "comp" time is permitted under California law, but at present not permitted under federal law. California Labor Code §204.3 provides that an employee may be given "comp time" either pursuant to a written agreement or a negotiated collective bargaining agreement. Under California law, "comp time" may be accrued up to a maximum of 240 hours and may be used at the employee's request rather than receiving overtime compensation. Eligible employees under California law are those regularly scheduled to work at least forty (40) hours in a week.

Importantly, however, federal law does not presently provide an exception allowing an employer to offer "comp time" in lieu of overtime pay. Legislation presently before Congress, HR 1180 or the "Working Families Flexibility Act of 2017 ," may change federal law to permit "comp time," up to a maximum of 160 hours. Employers should keep a close eye on this federal legislation, but will need to recognize that even if passed into law, the federal provision will differ in important ways from California law and, as with all wage and hour laws, the employer will be obligated to follow the provision giving the greatest rights to the employee.

One final and often misunderstood wage and hour issue arising under California law are alternative work weeks. Sometimes known as "four-by-ten" or other similar names, alternative work weeks provide approaches for employers and employees other than the traditional five day work week consisting of eight working hours per day.

California law, however, places significant procedural restrictions on an employer's ability to implement an alternative work week schedule. While an alternative work week can allow an employer to avoid overtime compensation in the context of a regularly scheduled work week requiring more than eight hours of work in a twenty-four hour period, the creation and maintenance of an alternative work week are governed by complicated rules. Briefly, an employer must first determine a work unit which will be affected by the alternative work week schedule.

There must be a specific alternative work week schedule proposed which includes work days not exceeding ten hours per day. The plan must be described in a written disclosure given to employees and at least one employee meeting held to discuss the proposed plan. The plan must then be subject to a secret ballot election by employees in the affected work unit and the results of the election must be filed with the California Division of Labor, Statistics and Research. If voted in by the employees in the affected work unit, reasonable accommodation must still be provided to employees who cannot work the alternative work week schedule. The employer may unilaterally repeal the alternative work week with advance notice, but employees who wish to abandon the alternative work week must make a petition for its appeal and hold a new election.

Closing Thoughts

This overview gives the reader no more than an introductory sense of the texture and complexity of federal and California wage and hour laws affecting large and small employers with operations in our state. Many multi-state employers, familiar only with the relatively straightforward compliance obligations posed by federal wage and hour laws alone, often find themselves having to do business one way in forty-nine other states and an entirely different way in California.

Identifying and developing a relationship with an expert, such as a qualified human resources professional and employment law counsel, can help a California employer to avoid the many traps posed by state and federal wage and hour law compliance obligations. Armed with an instinct to "do the right thing" for its employees, with open lines of communication to expert advice, and with a thoroughly informed decision-making process about wage and hour compliance, an employer can successfully do business in California.