The FLSA allows employer to pay a minimum cash wage of $2.13 per hour to employees in a “tipped occupation” as long as the employee’s tips make up the difference between the $2.13 cash hourly wage and the current federal minimum wage. Plaintiffs claimed that Applebee’s required them to perform work that did not produce tips, such as cleaning, inventory, stocking, and preparing food, for significant portions of their shift while compensating them at the lower $2.13 tipped rate. It was undisputed between the parties that plaintiffs received in cash hourly wage and tips a sum at least equal to the required minimum wage per hour for all hours worked.

Pursuant to Department of Labor (“DOL”) regulations, for employees who hold more than one job for the same employer, one which generates tips and one which does not, the employee is entitled to the full minimum wage rate while performing the job that does not generate tips. The DOL’s interpretive Field Handbook states that if a tipped employee spends a substantial amount of time (defined as more than 20 percent) performing related, non-tipped work, then the employer may not take the tip credit for the amount of time the employee performs those non-tipped duties.

The district court denied Applebee’s motion for summary judgment, concluding that the DOL’s Handbook was reasonable, persuasive and entitled to deference. The district court also concluded that plaintiffs had to “make a prima facie showing which hours were not properly paid,” and if there were no records of the time spent on specific duties, then the burden would shift to Applebee’s to show that the employees’ calculations were not reasonable.  Applebee sought an interlocutory appeal from Eighth Circuit Court of Appeal, arguing the DOL’s Handbook is contrary to statute and regulations.

The Court of Appeals affirmed the district court’s order. The Court of Appeals concluded that the DOL’s interpretation was entitled to deference, and therefore, controlling because the interpretation was not plainly erroneous or inconsistent with statute or regulation. The Court of Appeals further concluded the district court applied the proper burden of proof in which the initial burden was on the employees to establish that they worked hours for which they were not properly paid. If Applebee’s did not maintain sufficient records from which the employees can differentiate between when they performed tipped duties and whey they performed non-tipped duties, then the employees may use the relaxed standard of proof by “produc[ing] sufficient evidence to show the amount and extent of that work as a matter of just and reasonable inference.”

The Supreme Court denied certiorari of this case on January 17, 2012. Accordingly, employers who rely on the tip credit to satisfy the FLSA’s minimum wage requirements should both (a) ensure that they maintain records regarding the time each employee spends on tipped and non-tipped tasks; and (b) pay employees the minimum wage, without relying on the tip credit, for all time spent on non-tipped tasks if non-tipped tasks constitute a substantial amount (or more than 20 percent) of the employee’s time.

The Court of Appeals decision can be found here.

Plaintiffs were insurance claim adjusters that filed a lawsuit against their employer for unpaid overtime alleging that that they were erroneously classified as administrative exempt employees. Plaintiffs moved for summary adjudication of defendants’ affirmative defense that plaintiffs were exempt from overtime compensation. The trial court denied plaintiffs’ summary adjudication motion. The parties sought interlocutory review by the Court of Appeal.

The Court of Appeal reversed the trial court’s denial of the summary adjudication motion and held that the adjusters did not qualify as administrative exempt employees as a matter of law. The Court of Appeal concluded that only employees who performed work for general operations or at the level of making company policy could qualify under the “directly related to management policies or general business operations” element of the administrative exemption test.

The Supreme Court reversed finding the Court of Appeal misapplied the substantive law. The Supreme Court remanded to the Court of Appeal with directions that it review the trial court’s denial of plaintiffs’ summary adjudication motion under the appropriate legal standard as set out by the Supreme Court’s decision. The Supreme Court rejected the view that the administrative exemption is limited to employees who operate at the level of policy making.  The Court stated that the administrative/production dichotomy is a useful but it should not be relied upon in all cases. The Court held the Department of Labor (“DOL”) regulations expressly incorporated into the IWC Wage Order, and no other DOL regulations, should be relied upon in interpreting the administrative exemption. The Court concluded that the Court of Appeal erred by not applying the incorporated regulations.

The Supreme Court stated that to qualify as administratively exempt, employees must “(1) be paid at a certain level, (2) their work must be administrative, (3) their primary duties must involve that administrative work, and (4) they must discharge those primary duties by regularly exercising independent judgment and discretion.” The Supreme Court went on to explain that qualifying as “administrative” has both a qualitative and quantitative element that must be satisfied.  The “qualitative” character is satisfied where employees service a business through such actions as “advising management, planning, negotiating, and representing the company.” The “quantitative” character is “whether work is of ‘substantial importance’ to management policy or general business operations.”  The Supreme Court provided no further explanation on what would qualify as “substantial importance.” Accordingly, the application of the administrative exemption still remains unclear under California law.

To read the entire text of the decision, click here.

Natalie Dellinger sued Science Applications International Corporation for retaliation under the FLSA.  She alleged that the company refused to hire her after it learned that she had sued her former employer, CACI, Inc., under the FLSA’s wage and overtime provisions.  Dellinger charged that Science Applications’s motive for withdrawing its previous job offer was retaliation for her exercising her protected right to file an FLSA lawsuit. 

The district court dismissed Dellinger’s suit, finding that the FLSA’s anti-retaliation provision protects only employees and not prospective employees.  The Fourth Circuit agreed, stating the following:

Although [Dellinger] was an applicant for employment with Science Applications, and her application had been approved on a contingent basis, she never began work.  Section 203(g) provides that “employ” means “suffer or permit to work.”  Therefore an applicant who never began or performed any work could not, by the language of the FLSA, be an “employee.” 

To bolster her case, Dellinger argued that the FLSA makes it unlawful for “any person” to retaliate against any employee, and that because Science Applications is a “person,” it is prohibited from retaliating.  The Fourth Circuit disagreed – an employee may only sue employers for retaliation as explicitly defined in Section 216(b) of the FLSA.  The provision addressing “persons” in the FLSA prohibits other acts separate from retaliation – transporting goods, for example, produced by employees who are paid in violation of the Act. 

The Court also noted that the FLSA was intended primarily as a minimum wage and maximum hour law, with the anti-retaliation provision as a subpart of that broad paradigm – not as a free-standing protection.  The employment relationship is inherent to the purpose of the entire law and its substantive provisions. 

Dellinger finally urged the Court to extend the FLSA’s definition of employee to protect job applicants, relying on other statutes that protect potential employees – the Energy Reorganization Act, the National Labor Relations Act, the Occupational Safety and Health Act, and the Pipeline Safety Improvement Act.  The Court differentiated the terms and definitions in the FLSA from the named statutes, and it concluded that the text and purpose of the FLSA tie closely to the employment relationship, not authorizing prospective employees to bring civil action against prospective employers.   The dissent, however, would have adopted Dellinger’s position.

A complete copy of the opinion can be found here.  Dellinger’s attorney has indicated that a petition for rehearing en banc will be filed with the 4th Circuit.

In a wage and hour class action against Oracle Corporation, a settlement eliminated the claims of all subclasses of employees, except for the misclassification claims of employees who held the position of “Instructor” and were not California residents.  Oracle is headquartered in California and employed Instructors in 20 states, including California.  Plaintiffs argued that non-California resident Instructors who worked in California for at least a full day or full week needed to be paid overtime for the days or weeks worked in California under California law.  The plaintiffs further argued that Instructors who worked entirely outside California could recover federal overtime wages pursuant to the California Unfair Competition Law “(UCL”), although the overtime claims were time-barred under the Fair Labor Standards Act (“FLSA”).  In support of this argument, plaintiffs relied on the stipulated fact that the decision to classify Instructors as exempt was made in California, and therefore, the act of “unfair competition” originated from California and employees residing and working in other states who were impacted by the unfair competition could sue under the UCL.

The district court granted Oracle’s motion for summary judgment.  On appeal, the Ninth Circuit Court of Appeals affirmed in part and reversed in part, holding that the California Labor Code and the UCL applied to non-resident plaintiffs’ claims for overtime for day and weeks worked entirely in California.  However, the Ninth Circuit concluded that plaintiffs could not rely on the UCL to sue on behalf of employees who worked outside of California.  The Ninth Circuit subsequently withdrew its opinion and certified questions for the California Supreme Court to resolve as a matter of state law.    

The California Supreme Court first held that the Labor Code applied to overtime work performed for a California-based employer in California by a non-resident employee.  The Court reasoned that the Labor Code was intended to apply to any employee who performs work in California.  However, the Court recognized that other states have competing interests with California that need to be weighed in applying California law to their residents.  Limiting the analysis to the issue of overtime pay, the Court concluded that the interests of the other states at issue were minimal and no evidence existed to demonstrate that the states had a strong preference to have their overtime laws applied to their citizens when working out of state.  The Court warned that it might not reach the same conclusion in a choice of law analysis for other wage and hours laws.  Because the Court concluded that failure to pay non-residents overtime pursuant to California’s laws for work performed in California constituted a violation of California’s Labor Code, the Court also found that these plaintiffs could rely on the UCL to recover unpaid overtime.

Next, the Court addressed whether the UCL applied to overtime work performed outside of California for a California-based employer by non-resident employees, if the employer failed to comply with the overtime provisions of the FLSA.  The Court concluded that plaintiffs’ claims for overtime compensation under the FLSA for work performed in other states cannot serve as predicates for UCL claims.  Although it was assumed that the decision to classify Instructors as exempt was made in California, the Court reasoned that a claim for failure to pay overtime differs from an erroneous classification system and it is only unlawful to fail to pay an employee overtime when overtime is due.  As the Court stated, “for an employer to adopt an erroneous classification policy is not unlawful in the abstract.”  Because the employees at issue worked out of state, and nothing indicated the employees were paid in California, there was simply no “unlawful practice” in California that could support a UCL claim.  The Court warned that the UCL “might conceivably apply to plaintiffs’ claims if their wages were paid (or underpaid) in California.”    

To read the full decision, click here.

The lead plaintiff was a former store manager for Family Dollar, a national chain of over 6,800 stores in 44 states.  Plaintiff, like all other store managers, was classified by Family Dollar as an executive exempt from FLSA overtime pay requirements.  Plaintiff worked 50-65 hours per week and was paid a fixed salary plus a bonus which was directly related to the profitability of the store.  Each store manager supervised at least one hourly assistant store manager and multiple hourly clerks.  Plaintiff was permitted to set her own hours and was authorized to make decisions affecting the profitability of the store, subject to company policy.  Plaintiff’s duties included training, supervising, disciplining, scheduling and evaluating employees, and overseeing the store’s operations, including ordering inventory, customer relations, cash handling and budgeting.  Plaintiff was supervised by a district manager who visited the store once every two or three weeks.  The district manager followed plaintiff’s personnel recommendations 95% of the time.  Plaintiff claimed that she spent 99% of her work time performing non-executive tasks, such as stocking shelves, running cash registers, and cleaning.  Plaintiff explained that her job required that she “multi-task,” such that while she performed non-managerial task, she was also functioning as a manager.  Plaintiff argued that she was misclassified as exempt because she spent the vast majority of her time on non-executive tasks and therefore should be paid on an hourly basis and awarded unpaid overtime.  At summary judgment, the district court concluded that plaintiff was properly classified as an exempt employee and granted Family Dollar’s motion for summary judgment.  

The Fourth Circuit affirmed, holding that even though plaintiff was required to perform the nonexempt tasks needed for the successful operation of the store, she remained the highest level employee at the store and her income depended on the success of her performance and the profits at the store.  The Fourth Circuit noted that FLSA recognizes the nature of retail business and exempts retail executives from the requirement that the majority of their hours be spent on executive functions.  The Court held that although plaintiff claims that non-managerial task occupied most of her time, she was also concurrently managing the store and the person responsible for running the store.  Additionally, plaintiff was relatively free from supervision and there was typically no one else at the site to direct the store’s operations.  Because plaintiff’s claim was properly dismissed, the district court did not err in declining to permit plaintiff to pursue her claim on behalf of other similarly situated employees.             

For a copy of the full opinion of the Fourth Circuit, click here.

Plaintiff was employed as a full-time safety and security assistant by the School Board for Fairfax County, Virginia.  In addition to his position as a security assistant, plaintiff served as a high school golf coach.  Plaintiff’s job as a security assistant was not conditioned on his coaching activities and he was free to relinquish his coaching responsibilities at any time.  The School Board permitted plaintiff to work on coaching activities during his regular work day as a security assistant.  Plaintiff was reimbursed for his coaching expenses and received a stipend for his services as a coach.  Plaintiff estimated that he spent 400 to 450 hours annually on coaching activities.  In 2005, the School Board decided to pay all non-exempt employees for overtime hours that they served as coaches.  Plaintiff was retroactively paid overtime wages for hours he spent on coaching duties for the 2003-2005 golf seasons.  The School Board further determined that, effective July 2006, it would no longer permit non-exempt employees, such as plaintiff, to coach extra-curricular activities due to the potential issues associated with documenting coaches’ hours.  However, before the School Board implemented its new policy, the Department of Labor issued a guidance opinion letter about school coaching and Fair Labor Standards Act (“FLSA”) compliance, which concluded that full-time non-exempt employees were properly deemed “volunteers” in connection with their coaching activities and thus not eligible for overtime compensation.  As a result, the School Board abandoned its policy of prohibiting non-exempt employees from coaching and informed its employees that it would not pay overtime wages to full-time employees who “volunteer” to coach.        

Plaintiff filed a proposed collective action lawsuit against the School Board, claiming that he and other similarly situated employees were wrongfully denied overtime wages for serving as coaches in violation of the FLSA.  The district court denied plaintiff’s motion for conditional certification of a collective action.  At summary judgment, the School Board argued that plaintiff was a “volunteer,” and not an “employee,” under the FLSA, and therefore, he was not entitled to overtime wages for the time that he spent as the golf coach.  The district court granted summary judgment in favor of the School Board, concluding that plaintiff was a volunteer because coaching was not the same type of work as required by his regular position and the stipend he received was a “nominal fee” authorized by law to be paid to volunteers.

The Fourth Circuit of the United States Court of Appeals affirmed summary judgment in favor of the School Board.  The Court of Appeals concluded that plaintiff fell within the “volunteer” FLSA exemption applicable to public employment.  This exemption applies to any individual who performs services for a public agency if the individual receives no compensation or a nominal fee and the services are not the same type which the individual is employed to perform for such public agency.   The Court of Appeal rejected plaintiff’s argument that he never intended to be classified as a volunteer, as the evidence demonstrated that plaintiff was motivated to serve as the golf coach, in significant part, by humanitarian and charitable instincts.  The Court of Appeals further held that the School Board’s proactive decision to pay overtime to coaches or its change in policy regarding payment of overtime did not alter plaintiff’s status as a volunteer.   Finally, the Court of Appeals rejected plaintiff’s contention that his coaching stipend was more than a “nominal fee” permitted by law, as it was set regardless of his time and effort, and therefore, the stipend did not compensate him for services rendered. 

To read the entire Fourth Circuit opinion, click here.

29 U.S.C. §215(a)(3), the FLSA’s anti-retaliation statute, prohibits employers from discharging “any employee because such employee has filed any complaint” alleging violation of the FLSA.  In reversing the decision of the Seventh Circuit Court of Appeals which concluded that the anti-retaliation provision did protect employees who made only oral complaints, the Supreme Court held that the scope of statutory term “filed any complaint” includes oral and written complaints.  The Supreme Court reasoned that even if the term “filed” was interpreted to indicate that only written complaints should be included within the statute’s purview, the provision’s use of the terms “any complaint” suggested a broad interpretation that includes oral complaints.  Additionally, the Supreme Court concluded that a narrow interpretation of the provision would undermine the FLSA’s basic objectives and enforcement needs.   Moreover, the Supreme Court noted that the Secretary of Labor and the Equal Employment Opportunity Commission have consistently held the view that “filed any complaint” covers both oral and written complaints.

To read the United State Supreme Court’s entire opinion, click here.

Additional blog posts and articles regarding the holding in Kasten can be found here, here, here, here, here and here.  Several commentators point out that this marks a run of seven consecutive decisions in favor of retaliation plaintiffs by the Supreme Court since 2005.

In August 2010, Walker accepted Dovetail’s Offer of Judgment pursuant to Rule 68 of the Federal Rules of Civil Procedure in the amount of $10,000, subject to a credit for the $7,770 already paid to Walker.  Walker accepted the Offer of Judgment (which ended the case) and filed a Motion for Award of Attorneys’ Fees and Costs.  Walker calculated that his attorneys’ fees were $8,010, but sought only $4,000 (40 percent of the judgment) because Walker’s Retainer Agreement stated that his attorneys would be paid 40 percent of any recovery obtained in the case.  Dovetail opposed the motion for attorneys’ fees, arguing that the lodestar amount, not the contingency-fee agreement, is critical when calculating reasonable attorneys’ fees. 

The Magistrate Judge calculated the lodestar amount to be $7,061, but decreased the amount awarded to Walker to $4,000 because of the counsel’s own expectations as evidenced by the contingency fee percentage in Walker’s Retainer Agreement.  Dovetail objected to the Magistrate Judge’s recommendation, arguing that the forty percent contingency fee should be calculated from $2,230, not $10,000, because Dovetail paid $7,770 of the judgment before Walker instituted the action. 

The district court adopted the Magistrate’s recommendation.  The district court rejected Dovetail’s argument that the 40 percent contingency fee should be calculated from $2,230 — the amount that plaintiff allegedly “gained” as a result of the lawsuit — and not the judgment of $10,000.  Dovetail argued that its payment of $7,770 in June 2010 was not in settlement of the lawsuit, but rather an independent and unconditional payment to Walker.  The district court held that the Retainer Agreement evidenced that Walker’s attorneys expected to receive 40 percent of “any recovery” obtained by Walker, regardless of whether the case proceed to litigation.  Accordingly, the judgment amount of $10,000 was the appropriate measure of “recovery” for purposes of calculating the contingency fee.    

To read the district court’s memorandum opinion, click here.

During these hitches, plaintiffs were paid for 12 hours a day, regardless of whether they performed any work during their shifts.  During the other 12 hours of each day, plaintiffs slept aboard the ship and were required to remain on “stand by” and within 30-45 minutes of the ship at all times.  Plaintiffs filed a complaint against defendants, alleging defendants failed to properly calculate overtime wages for the seventh consecutive day worked and for the 12 hours each day of a hitch that plaintiffs were on call.  The trial court granted summary judgment in favor of defendants, holding that defendants’ compensation practices complied with the requirements of the California Labor Code.

The Court of Appeal reversed the judgment in favor of defendants and held defendants failed to establish that they had correctly compensated plaintiffs for all hours worked.  First, the Court of Appeals held that defendants impermissibly designated the workweek in such a way as to circumvent the statutory requirement to pay overtime rates for the seventh consecutive day.  The Court of Appeal further held that the restrictions placed on plaintiffs during their on-call hours subjected plaintiffs to defendants’ control for the full 14-day hitch, and therefore, the on-call hours constitute time worked.  However, the Court of Appeal found that plaintiffs were not entitled to compensation for 24 hours per workday.  Because California law authorizes employers to enter into an agreement with their 24-hour employees to exclude eight hours of sleep time each day and the undisputed evidence established that the parties had such an agreement, the Court of Appeal concluded that plaintiffs were entitled to compensation for an additional four hours — not 12 hours – for each day worked.    

To read the Court of Appeal’s decision, click here. 

Contributed by Laura B. Chaimowitz

Plaintiff worked for defendant as a janitor.  At the time of plaintiff’s hire, the parties orally agreed that he would work eleven hours a day, six days a week for a total of 66 hours per week.  Because plaintiff was a non-exempt employee, the parties orally agreed that he would earn 26 hours of overtime each week and be paid a total of $880 a workweek.  Defendant also claimed that plaintiff was shown a piece of paper at his hire that this salary was based on an regular hourly rate of $11.14.  Over three years after plaintiff began his employment, the parties signed a written employment agreement which stated plaintiff would be paid a salary of $880 a week.  Plaintiff was terminated four years later and filed a lawsuit against the defendant claiming defendant engaged in unfair business practices under Business & Professions Code section 17200 et seq.  Plaintiff predicated his cause of action on section 515(d) of the California Labor Code which provides that in computing the overtime rate required to be paid to nonexempt full-time salaried employees, “the employee’s hourly rate shall be 1/40th of the employee’s weekly salary.”  Plaintiff asserted that his weekly salary of $880 compensated him only for a regular 40-hour workweek and did not include payment for his regularly scheduled 26 hours of overtime.  Defendant argued that California’s “explicit mutual wage agreement doctrine” applied which allows an employer and employee to agree to a guaranteed fixed salary so long as the employer pays the employee for all overtime at least one and one-half times the employee’s basic rate.  At trial, the court entered judgment for the defendant finding a mutual wage agreement under which plaintiff’s fixed salary of $880 lawfully compensated him for both his regular and overtime work based on an regular hourly wage of $11.14 and an hourly overtime wage of $16.71.

The California Court of Appeal affirmed, holding that Labor Code section 515(d) does not prohibit explicit mutual wage agreements.  Under such a wage agreement, it may be agreed before the employee starts working that the employee will be paid a guaranteed salary so long as the employee receives at least one and one-half his basic rate for any hours worked beyond the statutorily workday of eight hours.  The Court of Appeal stated that plaintiff’s reliance on the Enforcement Policies and Interpretations Manual of the Division of Labor Standards Enforcement, which states that salaried non-exempt explicit wage agreements are no longer permitted pursuant to section 515(d), was misplaced because the Manual was not adopted in compliance with the Administrative Procedure Act.  The Court of Appeal further rejected plaintiff’s argument that the parol evidence rule prohibited defendant from introducing evidence of the parties’ oral agreement.  As the meaning of the term “salary” in the written agreement was ambiguous, parol evidence was properly admitted to determine the number of work-hours for which plaintiff earned his salary.   

To read the full opinion, click here.

For a prior blog post regarding unpaid overtime calculations under the Fair Labor Standards Act, click here.

Contributed by Laura B. Chaimowitz

Defendant, operator of seven residential care facilities, employed 24 workers.  Defendant admittedly treated 16 of these employees as independent contractors because they lacked social security numbers and issued each Form 1099 tax statements instead of the itemized wage statements required by California Labor Code section 266(a).  In 2008, the California Division of Labor Standards Enforcement (DLSE) performed a workplace inspection at defendant’s premises.  The DLSE issued defendant a citation for penalties under section 226.3 in the amount of $72,000, representing 288 violations for failing to provide the employees classified as independent contractors with itemized wage statement during the previous year.  The citation and penalty was affirmed after an administrative hearing before the DLSE and defendant’s writ of administrative mandamus was denied by the trial court.    

The California Court of Appeal affirmed the penalty amount and held that defendant’s failure to provide itemized wage statements to its employees was not “inadvertent” under the meaning of Labor Code section 226.3.  Under the Labor Code, the DLSE is instructed to take into consideration whether the employer’s failure to provide proper wage statements was “inadvertent” and may decide not to penalize an employer for a first violation when that violation is due to a “clerical error or inadvertent mistake.”  The Court of Appeal concluded that “inadvertent” has the commonplace meaning of “unintentional,” “accidental,” or “not deliberate.”  The Court of Appeal concluded that regardless of defendant’s subjective intent to comply with the Labor Code, defendant’s failure to provide its employees with wage statements was an intentional act and not an accident.  Accordingly, the DLSE was not required under section 226.3 to consider whether to mitigate the penalties awarded against defendant.         

To read the full opinion, click here.

Plaintiffs, former racing officials, filed suit against their former employer, alleging that they were improperly classified by defendants as exempt and defendants failed to properly pay overtime compensation in violation of the FLSA.  At summary judgment, the district court held that plaintiffs did not qualify for the administrative exemption, and therefore, plaintiffs were entitled to recover unpaid overtime wages.  Defendants conceded the number of hours for which overtime was owed.  Plaintiffs argued that they should received 150% of their regular rate of pay for all hours worked over 40 hours in a workweek, while defendants argued that plaintiffs were entitled to only 50% of their regular rate of pay for working hours over 40 hours per week.  The district court calculated the unpaid compensation owed to plaintiffs by applying an overtime premium of 50%, rather than 150%, of the regular rate for all hours worked over 40 hours per week.

The Fourth Circuit affirmed the district court’s application of an overtime premium of 50% of the regular rate of pay.  The Court of Appeals based its reasoning on Overnight Motor Transportation Co. v. Missel, a 1942 Supreme Court decision, which held that when calculating the “regular rate” of pay for an employee who agreed to receive a fixed weekly salary as payment for all hours worked, a court should divide the employee’s fixed weekly salary by the total hours worked in the particular workweek.  The Court of Appeals reasoned that Overnight Motor’s regular-rate determination implied that the weekly salary covers the base compensation for all hours worked and an award of 50% of the regular rate provided the employees with their unpaid overtime compensation.  For example, assume that an employee earns a weekly salary of $2,000 and works 50 hours during some weeks.  Under Overnight Motor, the regular rate of pay is $2,000 divided by 50 − the actual number of hours worked rather than 40 (the trigger point for overtime)− which is $40.  Plaintiffs argued that damages for the week are calculated by multiplying 1.5 by $40 for the 10 overtime hours- which is $600.  Defendants argued that because the employees have already been paid their regular hourly rate for each of the 50 hours they worked, the overtime owed is calculated by multiplying 0.5 (not 1.5) by $40 for the 10 overtime hours- which is $200. 

In rejecting the plaintiffs’ position, the Fourth Circuit stated that it was joining the Department of Labor and the First, Fifth, Seventh and Tenth Circuits in holding that a 50% overtime premium is appropriate in calculating unpaid overtime compensation in misclassification cases, so long as the employer and employee had a mutual understanding that the fixed weekly salary was compensation for all hours worked each workweek and the salary provided compensation at a rate not less than the minimum wage for every hour worked.     

This case demonstrates the importance to employers of committing to writing early in the employment relationship, such as in an offer letter, that the employee’s salary is intended to compensate the employee for all hours worked during each pay period, even if the hours an employee works fluctuate each week.  Such language may greatly undermine an argument by the employee that the salary was intended to compensate the employee for only 40 hours a week. 

To read the Fourth Circuit’s opinion, click here.

Blog posts about the Fourth Circuit’s opinion and the Seventh Circuit’s opinion on the same topic can be found here and here.

Reactor Films, Inc. (a producer of television commercials) hired “freelance crewmembers” as needed to complete its production activities and did not maintain full-time production employees.  Payday California, Inc. provided payroll processing for Reactor and other companies that produced television commercials.  Plaintiff was hired by Reactor to work on the production of several commercials and had his payroll processed by Payday.  Plaintiff filed an action against Reactor and Payday on behalf of himself and other similarly situated individuals for violation of, among other statues, Labor Code section 510 and 1194 (unpaid overtime); Labor Code section 203 (prompt payment of wages upon termination); Labor Code section 226 (adequacy of paystubs); and 29 U.S.C §§ 206 and 207 (federal minimum wage and overtime pay).  Plaintiff alleged that Reactor and Payday acted as “joint employers” and failed to promptly pay overtime wages and provide adequate paystubs. 

At summary judgment, Payday argued that it was not plaintiff’s “employer” and presented evidence that it did not hire or fire plaintiff or have the authority to do so, did not control his work, did not set or negotiate his wages, did not determine his hours or conditions of employment, and did not entered into a written or oral employment contract with him.  Plaintiff alleged that he understood he was a Payroll employee because he received payroll documents from Payday and Payday employees made statements to that effect.  Plaintiff presented evidence that the timecards, information sheets, eligibility verifications, and tax withholding forms he completed were provided by Payday.  Additionally, paystubs and W-2 forms identified Payday as plaintiff’s “employer of record.” Payday also paid workers’ compensation and unemployment insurance premiums for plaintiff.  The trial court concluded that Payday could not be liable as plaintiff’s “employer” for purposes of his wage claim, and therefore, entered summary judgment in favor of Payday.            

The Court of Appeal affirmed, holding that Payday was not plaintiff’s “employer” based on the definitions of set out under both (a) the California Industrial Welfare Commission (IWC) Wage Order No. 12, as interpreted by Martinez v. Combs, 49 Cal. 4th 35 (2010), and (b) the FLSA. 

Under the California Labor Code, the Court concluded that plaintiff failed to present evidence creating a triable issue of fact that Payday exercised control over plaintiff’s hours or working conditions.  As an issue of first impression, the Court further held that for purposes of the definition of “employer” under California wage claims, to “exercise control over workers’ wages” means “a person or entity that has the power or authority to negotiate and set an employee’s rate of pay, and not that a person or entity is physically involved in the preparation of an employee’s paycheck.”  The Court further held that “[t]he task of preparing payroll, whether done by an internal division or department of an employer, or by an outside vendor of an employer, does not make Payday an employer for purposes of liability for wages under the Labor Code wage statutes.”  The Court noted that this decision was consistent with a number of federal cases which remained analytically sound after Martinez, including Singh v. 7-Eleven, Inc. U.S. Dist. Lexis 16677 (N.D. Cal. March 8, 2007), which held that a parent company’s payroll activities for its franchisee were insufficient to demonstrate an employment relationship between the workers and the parent company for purposes of Labor Code wage statues. 

The Court further concluded that Payday did not meet the other prongs of the Martinez definition of “employer” because (a) it did not cause plaintiff “to suffer or permit to work,” and (b) it did not meet the common law employment test.  Payday could not be considered the common law employer under California law because it did not direct or supervise the production sites, did not provide any tools or equipment, and plaintiff’s work was not for the benefit of Payday or integral to Payday’s regular business operations. 

Applying the economic reality test under the FSLA, the Court concluded that Payday was not plaintiff’s employer for purposes of his federal wage claim because Payday did not exercise control over the plaintiff’s work by simply engaging in payroll activities at the request of Reactor.

Finally, the Court rejected plaintiff’s argument that Payday was estopped from denying its statute as an employer because it represented it was an employer to purchase workers’ compensation insurance.  Plaintiff failed to present any evidence that he detrimentally relied on Payday’s statements as required to establish an estoppel claim.    

 For a copy of the decision, click here.