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It was a big year for employment law in California's courts. Here we review nine of the most consequential cases, noting how they impact your business in practical terms.
Savea v. YRC, Inc.
In Savea v. YRC, Inc., a California court of appeal ruled in favor of an employer on a wage statement claim brought by an employee under Labor Code § 226(a). The employee had argued that the employer did not include all required information on employee wage statements because the employer had listed only its fictitious business name (“FBN”), rather than the name of its legal entity, and because the employer had not included the extra +4 numbers of its zip code (the unnecessary last four numbers sometimes added to zip codes).
The court said that there is no distinction between a legal corporation and its FBN, but it did stress the fact that the employer in this case had “a valid fictitious business name statement and renewal recorded in” two counties. In other words, a business who does business under another name but who has not officially recorded a FBN with the county would most likely still be required to list its legal entity name on employees’ wage statements.
ACTION REQUIRED: Companies doing business under a fictitious name should either ensure that their FBNs are recorded in the county in which they are doing business or ensure that their full legal entity name is listed on employees’ wage statements.
Townley v. BJ’s Restaurants
In Townley v. BJ’s, a California court of appeal ruled in favor of an employer on a “necessary expenditure” claim brought under Labor Code section 2802. The employee in Townley alleged that her employer was required to reimburse her and other employees for the required black, slip-resistant, close-toed shoes. The Court disagreed, reinforcing our previous understanding that slip-resistant shoes need not be reimbursed under California Labor Code requirements.
Notably, in Townley, the employees were not required to purchase a certain brand, style, or design of shoes, nor were they prohibited from wearing their shoes outside of work. The Court also noted that plaintiff had not argued that her shoes were required as part of a uniform or that they were not usual or generally usable in the restaurant occupation.
ACTION REQUIRED: If you require employees to wear a certain type of shoes for work, review your policy and ensure that it falls within the parameters of what the Court found permissible in Townley.
Ward v. Tilly’s
In Ward v. Tilly’s, a California court of appeal found that employees must be provided reporting time pay when an employer requires its employees to call in two hours before a potential shift to determine whether the employee needs to come in for the shift, even if the employee is told not to go in to work that day. Under the applicable wage order in Ward, an employee is owed reporting time pay when an employee is required to report for work and does report but is not put to work or is furnished less than half the employee’s usual or scheduled day’s work. The amount owed for reporting time is “half the usual or scheduled day’s work, but in no event for less than two (2) hours nor more than four (4) hours, at the employee’s regular rate of pay, which shall not be less than minimum wage.” IWC Wage Order 7-2001, § 5.
Notably, the court did not hold that calling into work under all circumstances constituted reporting. Indeed, the court expressly limited the holding that reporting time pay was required to the on-call system before it – one that gave employees two hours’ notice and disciplined employees for noncompliance - so it is yet to be seen how Ward will be applied to other on-call systems. Under Tilly’s system, employees were told to consider one of these on-call shifts “a definite thing until they are actually told they do not need to come in.” However, the on-call shifts were not included as part of the employees’ “scheduled day’s work” when wages were calculated unless the employee was actually required to work the on-call shift. The court held that the employees were due reporting time pay for those on-call shifts even if the employee was told not to come into work that day. A subsequent court decision found that the holding in Ward applies retroactively.
ACTION REQUIRED: Employers should consider alternatives to mandatory on-call systems such as the one used by Tilly’s. A better option may be to call employees when work is needed and simply allow those who want to work to accept the opportunity; employees should not be disciplined if they are unable or unwilling to report to work in these instances.
Rodriguez v. Nike Retail Services, Inc.
In Rodriguez v. Nike Retail Services, Inc., an employee brought a class action lawsuit alleging that employees should have been paid for time spent undergoing exit inspections whenever they left the store. The employer, Nike, argued that the amount of time spent doing off-the-clock bag searches was de minimis (i.e., an insignificant period of time worked that may be disregarded) since employees often spent less than one minute undergoing bag searches. Though a previous court decision found that the federal de minimis standard did not apply under California law, it left open the possibility that some other de minimis principle could apply “where there are wage claims involving employee activities that are so irregular or brief in duration that it would not be reasonable to require employers to compensate employees for the time spent on them.”
The lower federal court found that there was no issue of triable fact on the plaintiff’s claim and dismissed his claim. The Ninth Circuit, applying California law, rejected Nike’s argument and overturned the lower court decision. It said prior case law could not be interpreted as allowing work performed under 60 seconds to be considered de minimis. Additionally, the Court noted that employees frequently exited the store multiple times per day, and it pointed to evidence presented by the plaintiff that longer inspections were common, often at least a minute. In light of the evidence presented, the Court concluded that exit inspections did not qualify as “‘split-second absurdities’” that would potentially be permissible even under California law. The Court found that, even according to Nike’s expert’s study (which found that 92.2% of inspections took less than one minute, and the average inspection took between 16.9 and 20.2 seconds) “the vast majority of inspections took measurable amounts of time, and there is a genuine dispute between the parties as to whether these amounts were more than ‘minute,’ ‘brief’ or ‘trifling.’”
The Ninth Circuit also found that the district court erred in finding that Nike need only prove that “it would be administratively difficult to [record inspection time] given its timekeeping system.” The Court noted that employers are in a better position than their employees to devise alternatives that would permit the tracking of small amounts of regularly occurring time. Moreover, even though he was required to do so, the plaintiff had pointed to multiple viable alternatives for Nike to conduct on-the-clock bag checks and said the district court failed to explain why those proposals did not create a triable issue of fact.
ACTION REQUIRED: If employees regularly perform work off-the-clock, however short the period of time worked may be, the employer should look into changing its timekeeping system. Employers should consider devising ways to record employees’ time that does not require the employees to perform work off-the-clock either immediately before or after clocking in or out. Employers should also take caution when communicating with employees during non-work hours, as such communications may be considered time worked. Timekeeping policies should encourage employees to record all time spent on work-related duties, including very small amounts of time.
Gilberg v. Cal. Check Cashing Stores, LLC
In Gilberg v. Cal. Check Cashing Stores, LLC, the employer used an FCRA Disclosure and Authorization form that included disclosures and authorizations from several states. The form stated that these state-specific disclosures and authorizations applied to applicants and employees of those states only. For example, the California disclosure and authorization form in Gilberg expressly applied to “California applicants or employees only.”
There, the Ninth Circuit held that the FCRA’s “standalone document” and “clear and conspicuous” requirement means the FCRA disclosure, even if electronic, must be a separate form that cannot include any “extraneous information” (for example, including a liability release in a FCRA disclosure and an at-will employment disclaimer are prohibited). The Gilberg case also clarified that multi-state disclosure forms, containing disclosures from multiple states, are not complaint.
California employers who conduct pre-employment background checks, even through third party vendors, must provide applicants with at least two separate standalone forms providing disclosures and consent under the Fair Credit Reporting Act, and separately, disclosure and consent under California’s Investigative Consumer Reporting Agencies Act.
Employers should have their FCRA disclosure forms reviewed by experienced counsel to confirm that they include FCRA-required disclosure and authorization language only and confirm their FCRA disclosure forms are in plain language that can be comprehended by the reasonable person. When examining disclosure and authorization forms, employers should also confirm that they are compliant with state and local laws requiring additional disclosures/notices beyond the FCRA (e.g., California and San Francisco).
Goonewardene v. ADP, LLC
In Goonewardene v. ADP, LLC, the California Supreme Court addressed the question of whether an employee can sue an outside payroll service company for errors in the employee’s pay.
In that case, an employee who alleged unpaid wages, brought claims for breach of contract, negligence and negligent misrepresentation against his employer’s outside payroll service provider. Although there was no employment relationship between the payroll service and the employee for unpaid wages under the Labor Code, the employee brought his claims based on the third party beneficiary doctrine, under which an individual or entity that is not a party to a contract (i.e., the third party) may bring a breach of contract action against a party to the contract if that individual or entity establishes that it is likely to benefit from the contract, that a motivating purpose of the contracting parties is to provide a benefit to the third party, and that permitting the third party to bring its own breach of contract action against a contracting party is consistent with the objectives of the contract and the reasonable expectations of the contracting parties.
The Court found that the third party beneficiary doctrine does not apply to this situation because the underlying purpose of the contract between the employer and the payroll service is to benefit the employer. In addition, permitting employees to bring claims directly against payroll services in wage and hour lawsuits would result in considerable defense costs for the payroll company, which would ultimately be passed on to the employer through increased costs of the payroll services-- a result that would not be consistent with the objectives of the contract. Accordingly, the employees’ redress in such a situation would lie solely against the employer under applicable Labor Code and Wage Order provisions. Of course, the employer may have a claim against the payroll service provider pursuant to their contract if the provider was negligent or otherwise did not fulfill its obligations under the contract.
Employers who use outside payroll service providers should protect themselves through robust service agreements with the providers that set forth the specific payroll functions to be provided, and shift the burden to the provider to cover damages arising out of its failure to properly perform such services. Employers may also want to confirm that their payroll service providers are adequately insured for such losses. Lastly, it is important to note that this decision does NOT apply to PEO (Professional Employer Organization) or other joint employer situations, in which both parties can be found liable as employers. Employers are urged to have legal counsel review their services contracts with any outside payroll service providers.
Voris v. Lampert
In Voris v. Lampert, the California Supreme Court held that unpaid wages cannot be recovered through a tort claim for conversion.
In this case, the plaintiff, Voris, had worked alongside the defendant, Lampert, to launch three start-up ventures, partly in return for a promise of later payment of wages. After a falling out, Voris was fired and was never paid. He sued the companies and won on his claims for non-payment of wages under the California Labor Code and based on contract. Voris claimed he was unable to collect the monies he won because the companies did not have sufficient assets to pay. He then brought suit against Lampert individually, seeking to hold him personally responsible for the unpaid wages on a theory of common law conversion. Voris claimed that, by failing to pay the wages, the companies converted his personal property to their own use and that Lampert was individually liable for the companies’ misconduct.
On appeal, the California Supreme Court held that the tort of conversion does not apply to a claim for unpaid wages. In declining to extend the tort of conversion to the wrong of unpaid wages, the Supreme Court observed that “there already exist extensive remedies for the nonpayment of wages,” with “the primary bulwark” being the California Labor Code. The Supreme Court reasoned that a conversion claim for unpaid wages would largely duplicate Labor Code remedies, and would be a particularly blunt tool for deterring the nonpayment of wages—reaching not only those who act in bad faith, but also those who make good-faith mistakes, such as clerical errors.
This case is a win for employers. If the California Supreme Court had permitted a conversion claim of this kind to proceed, employers potentially could be held liable for tort damages (including punitive damages) for failing to pay wages.
Southern California Pizza Co., LLC (“SoCal Pizza”) v. Certain Underwriters at Lloyd’s, London
The California Court of Appeal recently ruled that a “wage and hour” exclusion in an employment practices liability insurance (“EPLI”) policy must be narrowly interpreted to extend coverage for reimbursement claims brought under California Labor Codes § 2800 and 2802.
Southern California Pizza Co. ("SoCal Pizza") owns and operates over 250 Pizza Hut and WingStreet restaurants, and was sued in a putative employee class action alleging violations of various California Labor Laws including: failure to provide overtime wages, accurate wage statements, proper meal and rest periods, and failing to reimburse employees for business-related expenses. SoCal Pizza tendered its defense to Lloyd's, who denied coverage. Lloyd's argued that the entire action fell within its wage and hour exclusion, which excludes coverage for "any Loss resulting from any Claim based upon, arising out of, directly or indirectly connected or related to, or in any way alleging violation(s) of any ... wage and hour or overtime law(s)." SoCal Pizza sued for breach of contract, bad faith, and declaratory relief. The trial court agreed with Lloyd's and interpreted the wage and hour exclusion broadly to exclude coverage for the entire class action.
On appeal, the California Court of Appeal reversed the lower court’s finding. Specifically, the Court determined that the meaning of the phrase "wage and hour ... law(s)" in Lloyd's exclusion should be narrowly interpreted to apply only to laws "concerning duration worked and/or remuneration received in exchange for work." Accordingly, the Court determined that SoCal Pizza's alleged failure to reimburse business expenses is not excluded from coverage because the reimbursement statutes (§§2800 and 2802) are not sufficiently related to California's "wage and hour" statutes. Furthermore, the reimbursement statutes do not mention wages or hours, nor do they appear in the Labor Code's "compensation" or "working hours" sections. Finally, because reimbursement payments are not payments made in exchange for labor or services, the class claims are not related to "remuneration received in exchange for work," and are therefore not within Lloyd's wage and hour exclusion.
The Court’s holding is good news for EPLI policy-holders currently engaged in and/or facing wage and hour litigation. SoCal Pizza demonstrates that wage and hour exclusions in EPLI policies might not eliminate insurance coverage for every cause of action in what has traditionally been called a "wage and hour case." Depending on the claims made, EPLI carriers will have to defend policyholders in such litigation immediately and entirely pursuant to their obligations under long-standing California insurance law. This is especially true when an allegation does not involve remuneration received in exchange for work. Of course, coverage depends on the specific verbiage of the exclusion itself: Employers should always tender the claims to their EPLI insurers, and contact coverage counsel to review any denials which appear to be based on overly-broad applications of policy exclusions.
ZB, N.A., and Zions Bancorporation v. Superior Court of San Diego County
California Labor Code section 558 provides that employers shall be subject to a civil penalty if they violate any provision regarding hours and days of work. Section 558 goes on to say that the penalty shall be $50 for each underpaid employee for each pay period in which the employee was underpaid in addition to an amount sufficient to recover unpaid wages, and the fixed penalty shall increase to $100 for each subsequent violation. Many were anticipating this case for clarity on whether the “unpaid wages” referred to in Section 558 would be classified as “wages” (which would make this portion of the claim subject to arbitration) or as “penalties” (which would not be subject to arbitration). In this case, the California Supreme Court held that employees cannot recover unpaid wages as civil penalties under the Private Attorneys General Act (“PAGA”) and Labor Code section 558. This ruling was long-anticipated by employers and employees alike, who were waiting to see if the Supreme Court would classify the “unpaid wages” provided for in Labor Code section 558 as wages (which would make this portion of the claim subject to arbitration) or as penalties (which would not be subject to arbitration).
The California Supreme Court found that section 558 does not permit employees to recover unpaid wages under PAGA at all, and that a plaintiff has no private right of action to seek unpaid wages under Section 558, meaning that an employee can never seek unpaid wages under Section 558; only the Labor Commissioner can include an amount sufficient to cover unpaid wages in a citation.
Though the Court’s ruling may appear favorable to employers, the decision does not mean that employees cannot file lawsuits to recover unpaid wages. In fact, in sending the case back to the trial court, the Court indicated that the trial court could consider whether to allow the plaintiff to amend her complaint to request unpaid wages under an appropriate cause of action.
Arbitration: the roller-coaster ride continues
A pair of recent California court decisions have dealt double blows to the enforceability of arbitration agreements in the employment setting. In both cases, the courts found that the agreements were unenforceable because they were procedurally and substantively unconscionable. You'll find these cases in Part 7 of this series.