Interesting New California Decision About Employee Vacations

Most employers doing business in California know that California law requires (in most cases) that all of an employee’s accrued and unused vacation time must be paid out to the employee when his or her employment ends. This is because of Labor Code § 227.3:

Unless otherwise provided by a collective-bargaining agreement, whenever a contract of employment or employer policy provides for paid vacations, and an employee is terminated without having taken off his vested vacation time, all vested vacation shall be paid to him as wages at his final rate in accordance with such contract of employment or employer policy respecting eligibility or time served; provided, however, that an employment contract or employer policy shall not provide for forfeiture of vested vacation time upon termination. ….

There have been a multitude of court decisions interpreting this statute. While full payout of accrued vacation is required, these earlier court decisions have recognized that the statute does not mandate that employers actually offer vacation time to employees, or in any particular amounts. The law also does not require employers to continue awarding new vacation time to employees ad infininitem while those employees already sitting on a huge bank of unused time; the company is free to set an “accrual cap.” to prevent the endless accumulation of vacation time.

This week, a new California decision, Bell v. H.F. Cox, Inc., addressed two other interesting questions associated with Labor Code § 227.3 and the vacation requirements under California law: (1) is Labor Code § 227.3 preempted by ERISA; and (2) whether current employees must receive vacation pay at their regular rate.

The answer given by the court in Bell, at least on the facts of that case, was no to both questions.

The vacation policy at issue in the Bell case was a bit unusual. Employees would be awarded a certain number of weeks of vacation time each year, based on their length of service. But when they took the vacation, they would be paid at a flat rate of $500 per week (later increased to $650 per week), instead of at their regular rate of pay. When the employees left employment, their unused time was forfeited.

A group of employees sued, arguing that the policy violated Labor Code § 227.3 both as to terminated employees, and as to current employees because of the flat payment provision. The plaintiffs argued that Section 227.3 of the Labor Code requires all vacation time – including vacation time taken by current employees – to be paid out at the employee’s regular rate of pay.

First, ERISA preemption.

The policy’s provision requiring a forfeiture of vacation upon termination appears at first blush to be an obvious violation of Section 227.3, which prohibits vacation policies which “provide for forfeiture of vested vacation time upon termination.” Yet the employer in Bell argued that Labor Code § 227.3 in this instance was preempted by ERISA because its vacation policy was actually an ERISA plan.

This sort of arrangement – an ERISA vacation plan that preempts state law – is indeed possible, as the U.S. Supreme Court discussed in a case called Massachusetts v. Morash, 490 U.S. 107 (1989). But as reflected by the Morash case (and other cases since then), in order for the ERISA vacation plan concept to work, the vacation plan must meet the requirements of an ERISA plan. Among other things, this means that the plan must be funded–the company must dedicate a pile of money for the payment of vacation benefits, and vacation benefits can only be paid from this pile. If the company pays for vacation benefits out of its general checkbook, it’s not an ERISA plan and there is no ERISA preemption.

And that was the problem in the Bell case. The employer offered testimony that it had set up and funded an irrevocable trust to pay vacation benefits and that all benefits were paid by this trust. That might have been enough to show ERISA preemption–if it were the only evidence on the subject. Alas, it was not. The company had also filed a few tax forms which stated that employee vacations were paid from “[g]eneral assets of the sponsor.” Whoops. The company argued that the statements about vacation pay in these tax forms were a mistake, but as far as the court in Bell was concerned, the language of those tax forms created a jury question about whether or not there was truly a separate and dedicated trust for the payment of employee vacations, or whether vacation was paid from the “general assets” of the company. Hence, the trial court’s grant of summary adjudication on the ERISA preemption question was found to be improper.

Next, the “regular rate” issue.

The plaintiffs in the Bell case also argued that the company’s practice of paying out vacation time to current employees at a flat rate of $500 (or $650) per week, rather than at the employee’s regular rate for a week of pay, was a violation of Labor Code § 227.3. They pointed to the portion of Section 227.3 which requires payouts of vacation time to be at the employee’s “final rate in accordance with such contract of employment.”

The problem with this argument, according to the court, was that the rate provision of Section 227.3, by its terms, does not kick in until an employee’s employment as been terminated, and thus the provision could not have no effect upon current employees:

Labor Code section 227.3, by its express terms, applies only to the situation where an employee is terminated without having taken off his or her vested vacation time. Neither Labor Code section 227.3 nor any other authority cited by plaintiffs supports the proposition that, apart from the situation where an employee is terminated with unused vacation time, a vacation benefits policy must provide for payment of vacation time at an employee’s regular rate of pay. [Ed. note – italics in original.]

In other words, it’s only at the end of employment where an employee must be paid out accrued vacation “at his final rate in accordance with such contract of employment or employer policy respecting eligibility or time served” (to use the language of Section 227.3). While employment is still ongoing, Section 227.3’s rate provision has no application.

D.R. Horton and Gentry are Dead! Long Live D.R. Horton and Gentry!

Well, maybe that proclamation is a bit premature. But it does seem to be the trend. Yet another court has forced employees into individual arbitration whilst openly criticizing the California Supreme Court’s analysis in Gentry v. Superior Court, 42 Cal.4th 443 (2007) as well as flatly rejecting the NLRB’s decision in D.R. Horton, 357 NLRB 184 (2012)… and once again, this new decision is from a court in California.

This is the third California court in recent weeks to have blessed individual arbitration notwithstanding Gentry and D.R. Horton, as we have reported previously (see How Much Longer Until Gentry is Dead and Gone? and California Court Enforces Class Arbitration Waiver. Pandemonium Ensues).

Who could have foreseen that all of this individual-arbitration love would come to us gift wrapped from the Golden State, of all places?

This latest shot at D.R. Horton and Gentry comes to us courtesy of the California Court of Appeals (Fourth District) in Truly Nolen of America v. Superior Court. A couple of employees had sued Truly Nolen for California wage and hour violations. They had signed arbitration agreements which were silent on the question of class arbitration. The trial court agreed to order the case into arbitration but, relying upon Gentry, held that class arbitration must be made available.

The Court of Appeals reversed.

First, the Court of Appeals dealt with Gentry. The court’s treatment of Gentry is quite interesting, so I will discuss it at some length.

The court noted (correctly) that Gentry did not flatly prohibit all class waivers in overtime cases. Instead, Gentry required a four-factor balancing whenever a court was confronted with a class waiver: “(1) the modest size of the potential individual recovery; (2) the potential for retaliation against members of the class; (3) the fact that absent class members may be ill informed about their rights; and (4) other real world obstacles to the vindication of class members’ statutory rights.” According to Gentry, if class arbitration “would be a significantly more effective way of vindicating the rights of affected employees than individual arbitration,” the court must toss the class waiver. And, for good measure, Gentry noted that this four-factor balancing could not offend the Federal Arbitration Act, because the balancing was based upon “[t]he principle that in the case of certain unwaivable statutory rights, class action waivers are forbidden when class actions would be the most effective practical means of vindicating those rights,” and this principal is supposedly “an arbitration-neutral rule” which “applies to class action waivers in arbitration and nonarbitration provisions alike.”

Does this logic survive the U.S. Supreme Court’s decision AT&T Mobility v. Concepcion? In AT&T Mobility, recall, the Supreme Court held that state laws that attempt to subject certain types of arbitration agreements to unique, stricter enforceability requirements (such as prohibitions on class waivers) are preempted by the Federal Arbitration Act.That holding does not sound very good for Gentry.

And indeed, in this new Truly Nolen decision, the court noted that virtually every court to have looked at the question has held that Gentry is no longer good law following AT&T Mobility. The Truly Nolen court even stated that it agreed that Gentry should not survive AT&T Mobility: “it is questionable whether courts can validly invoke Gentry to require an objecting party to engage in classwide arbitration.” But then the Truly Nolen court stated that, as a mere Court of Appeals, it was bound by stare decisis and thus unable to boldly proclaim the death of Gentry without giving the California Supreme Court itself a chance to opine on the question. (For the unitiated, Professor James Gordon has commented that “stare decisis” is Latin for “we stand on our past mistakes“).

Yet, according to the court, the lingering enforceability of Gentry did not matter, because even if Gentry was still alive and kicking, the plaintiff failed Gentry‘s four-factor test. This is because the plaintiff’s “evidence” consisted only of two conclusory lawyer declarations which, according to the court, provided no “specific facts about the named plaintiffs, the class of former or current Truly Nolen employees, the facts pertinent to their claims in this case, or the relevant employment conditions.” The court took a very low opinion of these declarations, stating that “to the extent there exists authority supporting the application of the Gentry factors based solely on generalized statements from attorneys about the benefits of classwide arbitration, we find this authority unpersuasive.”

Instead, the court turned to the actual plaintiffs themselves, both of whom “acknowledged they were aware of their rights under wage and hour laws, and expressly notified their manager that their rights were being violated.” The Court also noted that the other facts of the facts weighed strongly against requiring class arbitration under Gentry:

the arbitration agreements at issue contain a specific provision prohibiting Truly Nolen from retaliating for making a complaint under the employer’s dispute resolution system. Additionally, the arbitration agreement provides numerous protections to employees who bring individual claims, including that Truly Nolen bears the cost of the arbitration proceeding (regardless who prevails) and that if the employee chooses not to be represented by counsel, Truly Nolen must also appear without legal representation. Moreover, without any evidence of the amount of damages at stake, it is far from clear that it would be cost prohibitive for plaintiffs to arbitrate their claims on an individual basis.

In the face of this record, the Truly Nolen court held that there was simply an insufficient basis to require class arbitration under the Gentry test, even if Gentry still had some life left in it.

The Truly Nolen court then addressed the NLRB’s decision in D.R. Horton. In D.R. Horton, the National Labor Relations Board had held that an employer who imposes a mandatory arbitration agreement upon employees that does not permit class arbitrations violates Section 7 of the National Labor Relations Act, and that this effective prohibition on class waivers in the employment context was not preempted by the Federal Arbitration Act. The Truly Nolen court made swift work of D.R. Horton, stating that it was, quite simply, wrongly decided:

As have other courts, we find the NLRB’s conclusion on the preemption issue to be unpersuasive and we decline to follow it. (Nelsen v. Legacy Partners Residential, Inc. [(2012) __ Cal.App.4th __, __, 2012 Cal.App. LEXIS 821, *33-39]; Iskanian [v. CLS Transportation Los Angeles, LLC (2012) 206 Cal.App.4th 949, 961-63]; see also Jasso v. Money Mart Express, Inc., [(N.D. Cal. 2012) __ F.Supp.2d __, 2012 U.S. Dist. LEXIS 52538, *9-*12.] The United States Supreme Court has held that arbitration agreements pertaining to statutory claims must be enforced according to their terms, absent an express ” ‘contrary congressional command’ overriding the FAA.” (CompuCredit [Corp. v. Greenwood (2012) __ U.S. __, __, 132 S.Ct. 665, 670.] In light of this clear authority, Horton‘s analysis is unsupported.

Will Truly Nolen be the vehicle by which the final fate of Gentry gets decided? Stay tuned!

Photo credit: freedigitalphotos.net

How Much Longer Until Gentry is Dead and Gone?

Back in June, I reported on Iskanian v. CLS Transportation Los Angeles, LLC, a California court decision where the court – shock! – enforced a mandatory arbitration agreement even though it contained an express class waiver.

Now, another California court has affirmed a decision compelling individual arbitration, even through the plaintiff wanted to bring a class claim – but this time, the arbitration agreement contained no express class waiver.  Instead, it contained language that was inconsistent with the notion of class claims, and contained no express consent to class arbitration.  The trial court held that only individual arbitration could be compelled in this instance, and now, in Nelsen v. Legacy Partners Residential, Inc., the Court of Appeals has agreed.

Fun stuff!

The plaintiff in Nelsen alleged various California Labor Code violations and wanted to bring her claim as a class action.  The employer, pointing to her arbitration agreement, filed a motion to compel her into an individual arbitration.

Why an individual arbitration?  As the employer explained – and as the Court of Appeals ultimately agreed – it is because the plaintiff’s agreement contemplated only a “two-party” scenario, claims involving the Company and “myself“, rather than claims between the Company and “myself and others who might want to band together with me and sue as a class“:

the arbitration contemplated by Nelsen‘s arbitration agreement in this case involves only disputes between two parties—Nelsen (“myself”) and LPI.  It does not encompass disputes between other employees or groups of employees and LPI.  Other portions of the agreement reinforce the two-party intent of the agreement.  The agreement provides for an appeal of the arbitrator‘s award “at either party’s written request.” (Italics added.)  In bold letters, the agreement states, “I understand by agreeing to this binding arbitration provision, both Legacy Partners and I give up our rights to trial by jury.”  (Italics added.)  All of the relevant contractual language thus contemplates a two-party arbitration.  No language evinces an intent to allow class arbitration 

But what about Gentry v. Superior Court, 42 Cal.4th 443 (2007)?  Remember, in Gentry, the California Supreme Court had held that class waivers in arbitration agreements cannot be enforced if “class arbitration would be a significantly more effective way of vindicating the rights of affected employees than individual arbitration.” The Iskanian decision – the subject of my prior blog post – held that Gentry had died a quick, ignoble death at the hands of the U.S. Supreme Court in AT&T Mobility v. Concepcion, since Concepcion requires that arbitration agreements be placed on the same footing as all other contracts and invalidates state laws that attempt to impose unique requirements that are peculiar to arbitration agreements.


In this new case, the Nelsen court in this new decision acknowledged Iskanian (and a handful of federal district court decisions that had reached the same conclusion about Gentry) but ultimately punted on the question of whether Gentry was dead and buried because the plaintiff had submitted no evidence on any of the Gentry factors.  Whoops:

we need not decide here whether Concepcion abrogates the rule in Gentry.  By its own terms, Gentry creates no categorical rule applicable to the enforcement of class  arbitration waivers in all wage and hour cases. …  As discussed earlier, before such waivers can be held unenforceable, Gentry requires a predicate showing that (1) potential individual recoveries are small; (2) there is a risk of employer retaliation; (3) absent class members are unaware of their rights; and (4) as a practical matter, only a class action can effectively compel employer overtime law compliance. …  The trial court was in no position in this case to make a determination that any of the Gentry factors applied. Nelsen supported her opposition to LPI‘s motion to compel with a one and a half page declaration solely addressing facts relevant to procedural unconscionability. She submitted no evidence as to any of the factors discussed in Gentry. The record is thus wholly insufficient to apply Gentry even assuming for the sake of analysis Gentry has not been vitiated by Concepcion. … Having relied on Gentry in her opposition to the motion to compel in the trial court, it was Nelsen‘s burden to come forward there with factual evidence supporting her position classwide arbitration was required. … She is not entitled to a remand for the purpose of affording her a second opportunity to produce such evidence, as she now requests [emphasis added]

The plaintiff had also argued that the agreement was substantively unconscionable because it was not bilateral.  But the Court made quick work of this argument, holding that the plaintiff was simply wrong: the agreement was undeniably bilateral because the agreement itself stated that it applied to “any claim, dispute, or controversy … between myself and the Company,” which would (of course) cover disputes brought by the Company against the plaintiff.  


In this humble blogger’s judgment, it is only a matter of time before Gentry is formally declared a relic of the past.  

California Court: Franchisor Potentially On the Hook for Sexual Harassment by Franchisee’s Employee

A teenager named Taylor Patterson was employed at a Domino’s Pizza franchise in California. She claimed that one of the assistant managers “sexually harassed and assaulted her at work,” and she sued both the manager and the franchisee (a company with the oddly fateful name “Sui Juris”). But she also sued Domino’s Pizza itself – the franchisor – and claimed that the franchisor should be held responsible for the conduct of one of its franchisee’s employees.

And today, in Patterson v. Domino’s Pizza, LLC, a California court has held that, yes indeed, the franchisor might be on the hook.

How could this be?

In California, who is (and who isn’t) an “employer” depends on control. Generally speaking, if you have sufficient control over a putative employee, then you are that person’s employer. I am oversimplifying a bit, but only just a bit. It is all about control.

Domino’s pointed to the franchise agreement between itself and Sui Juris, which stated, among other things, that Sui Juris “shall be solely responsible for recruiting, hiring, training, scheduling for work, supervising and paying the persons who work in the Store and those persons shall be your employees, and not [Domino’s] agents or employees.”

Yet the Court noted the following additional facts:

• Other language in the franchise agreement sets minimum “qualifications” for a franchisee’s employees and their required “demeanor.”
• Franchisee employees are forbidden by Domino’s – under penalty of loss of the franchise – from working without disclosing their identities to Domino’s.
• The franchisee must install and use specific software approved by Domino’s for employee training.
• Domino’s published a “Manager’s Reference Guide” setting forth hiring reuqirements for all “personnel involved in product delivery.”
• Domino’s set the minimum contents that must be included in personnel files.
• Domino’s required all employees to submit “[t]ime cards and daily time reports.”
• Domino’s imposed rigid dress code requirements on all manner of things, including the permissibility of such things as “[t]ongue rings,” “clear tongue” retainers, and body piercings.
• Domino’s had “independent access” to the franchisee’s computer systems and oculd audit its tax returns and financial statements at its whim.
• Domino’s requires the franchisee to name Domino’s as an additional insured on its liability insurance policies.
• “Domino’s also determines the franchisee’s store hours, its advertising, the handling of customer complaints, signage, the e-mail capabilities, the equipment, the furniture, the fixtures, the décor, and the ‘method and manner of payment’ by customers. Domino’s regulates the pricing of items at the counter and home delivery, and it sets the standards for liability insurance.” 

(Whew.)

And then there was the testimony of the owner of the aforementioned Sui Juris:

Daniel Poff, the Sui Juris owner, testified at his deposition that Claudia Lee, a Domino’s “area leader,” told him to fire Miranda [the alleged harasser]. He said he had to comply with the instructions of the Domino’s area leaders because “[i]f you didn’t, you were out of business very quickly.” He said Lee also told him to fire another employee because of his performance in handling bags. Poff had no choice; he had to follow Lee’s instructions and fire that employee. His operation was monitored by the Domino’s inspectors, and their decisions determined whether he could maintain his franchise.

This same owner also testified that, when he had “signed with Domino’s, . . . [he] was told, in no uncertain terms, that if [he] did not play ball the way they wanted [him] to play ball, that [his franchise] would be in jeopardy,” that Domino’s required that all employees had to “look and act a certain way,” and that Domino’s established guidelines and policies on things such as employee attendance and sexual harassment. The owner also claimed that Domino’s sent inspectors to verify compliance with the foregoing, “called the store on the sly,” and used “mystery shoppers” to determine whether Sui Juris was compliant. “I was getting ticky-tacked to death by inspectors,” claimed the owner.

According to the court, all of Patterson’s evidence created an issue of fact as to whether or not Domino’s had sufficient “control” over Patterson to constitute her employer under California law.

If you are a franchisor operating in California, pay heed to this decision, and be aware that you may be in the crosshairs of your franchisee’s employees

Image credit: freedigitalphotos.net

California Court Enforces Class Arbitration Waiver. Pandemonium Ensues.

One of the more entertaining, ongoing sagas in employment law concerns the enforceability of class waivers in employment arbitration agreements. The NLRB, in its recent decision in D.R. Horton, had opined that any employer-promulgated agreement that attempts to curtail the right to pursue a class or collective claim violates Section 8(a)(1) of the National Labor Relations Act, “notwithstanding the Federal Arbitration Act… .”

Can the NLRB brush aside the Federal Arbitration Act so lightly?

Not according to a new decision issued by a court in California (of all places). This new decision is Iskanian v. CLS Transportation Los Angeles, LLC. According to the court in Iskanian, the NLRB’s opinions concerning the Federal Arbitration Act are not entitled to any deference at all, since the FAA is not the NLRB’s bailiwick:

If D.R. Horton only involved application of the NLRA we would most likely defer to it. The D.R. Horton decision, however, went well beyond an analysis of the relevant sections of the NLRA. Crucially, the decision interpreted the FAA, discussing [the U.S. Supreme Court’s decision in AT&T Mobility v.] Concepcion and other FAA-related authority in finding that the FAA did not foreclose employee-initiated class or collective actions. As the FAA is not a statute the NLRB is charged with interpreting, we are under no obligation to defer to the NLRB‟s analysis. “[C]ourts do not owe deference to an agency‟s interpretation of a statute it is not charged with administering or when an agency resolves a conflict between its statute and another statute.” [Citation].

We decline to follow D.R. Horton. In reiterating the general rule that arbitration agreements must be enforced according to their terms, Concepcion (which is binding authority) made no exception for employment-related disputes…. [Many citations omitted].

The Iskanian court pointed instead to the U.S. Supreme Court’s decision in AT&T Mobility v. Concepcion, where the Supreme Court had stated that arbitration agreements must (per the FAA) stand on the same footing as all other contracts, and cannot be made subject to specially-restrictive rules that only apply to arbitration agreements. The Iskanian decision also noted that the NLRB’s decision in D.R. Horton ran afoul of an even more recent U.S. Supreme Court decision, CompuCredit Corp. v. Greenwood, where the Supreme Court had recognized that the FAA controls the enforceability of all arbitration agreements unless the FAA had been “overridden by a contrary congressional command.” As this new Iskanian decision notes, there is no “contrary congressional command” (in the National Labor Relations Act or anywhere else) concerning whether employment arbitration agreements fall outside the wide expanse of the Federal Arbitration Act.

And, for good measure, the Iskanian court also held that not only had the U.S. Supreme Court explicitly overruled California’s “Discover Bank” rule, Concepcion had also implicitly overruled Gentry v. Superior Court, 42 Cal.4th 443 (2007), wherein the California Supreme Court had held that class waivers in arbitration agreements cannot be enforced if “class arbitration would be a significantly more effective way of vindicating the rights of affected employees than individual arbitration.” According to Iskanian, there is no way that Gentry can survive Concepcion:

Concepcion thoroughly rejected the concept that class arbitration procedures should be imposed on a party who never agreed to them. … The Concepcion court held that nonconsensual class arbitration was inconsistent with the FAA because: (i) it “sacrifices the principal advantage of arbitration—informality—and makes the process slower, more costly, and more likely to generate procedural morass than final judgment”; (ii) it requires procedural formality since rules governing class arbitration “mimic the Federal Rules of Civil Procedure for class litigation”; and (iii) it “greatly increases risks to defendants,” since it lacks the multilevel review that exists in a judicial forum. [Citation]. This unequivocal rejection of court-imposed class arbitration applies just as squarely to the Gentry test as it did to the Discover Bank rule.

Lastly, the Iskanian court rejected the plaintiff’s argument that California-law Private Attorneys’ General Act (PAGA) claims were “public rights” that were supposedly “unwaivable.” A few other California courts of appeal had held otherwise, but the new Iskanian decision simply says that these decisions are not controlling and were wrongly decided in light of Concepcion.

Shock: California Employer Loses Attempt to Compel Employee Into Arbitration Program

A California Court of Appeals has affirmed a trial court’s determination that the mandatory employment arbitration agreement used by carpet and flooring giant Empire Today was both procedurally and substantively unconscionable under California law, and hence unenforceable.

The “under California law” bit is the most interesting part of the Court’s analysis, since the arbitration agreement specified that it was to be interpreted under Illinois law, not California law. But long-time followers of California courts on this particular issue should not be surprised that the court was not hindered by such a contractual road bump.

There were many, many problems with this agreement, both in terms of its content and how it was signed:

• It consisted of “11 pages of densely worded, single-spaced text printed in small typeface.”
• The arbitration clause was buried in “the penultimate of 37 sections which … [was] neither flagged by individual headings nor required to be initialed”
• The employees who signed were manual laborers and non-native English speakers, and the manager who hired them refused their requests for a Spanish-language version of the documents.
• The employees were told that they had to sign if they wanted to work.
• One of the employees was told he could not take the agreement home to review it.
• The agreement referred to rules for arbitration proceedings that were not provided to employees.
• The agreement shortened the limitations period for all claims to just 6 months.
• The agreement required employees to pay all of Empire Today’s attorneys’ fees, without imposing any reciprocal obligation on Empire Today.
• The agreement exempted any claims “seeking declaratory and preliminary injunctive relief to protect Empire’s proprietary information and non-competition/non-solicitation provisions.”

Anyone who is even remotely familiar with California’s unconscionability law concerning arbitration contracts need read no further. This agreement was dead in the water… if California law applied.

But did it? As noted, the agreement said it was governed by Illinois law, not California law. Empire Today argued that the Court should honor this language. Alas, the court was hearing none of it. It quoted from an older California Supreme Court decision (Washington Mutual Bank, FA v. Superior Court (2001) 24 Cal.4th 906), and said that California law must apply because applying Illinois law would work a “substantial injustice”:

“[A] choice-of-law provision, like any other contractual provision, will not be given effect if the consent of one of the parties to its inclusion in the contract was obtained by improper means, such as by misrepresentation, duress, or undue influence, or by mistake. Whether such consent was in fact obtained by improper means or by mistake will be determined by the forum in accordance with its own legal principles. . . . Choice-of-law provisions contained in [adhesion] contracts are usually respected. Nevertheless, the forum will scrutinize such contracts with care and will refuse to apply any choice-of-law provision they may contain if to do so would result in substantial injustice to the adherent.‟

Applying these principles, the same factors that render the arbitration provision unconscionable warrant the application of California law. As seen in our preceding discussion of procedural and substantive unconscionability, the Agreement was obtained by “improper means” … and, to the extent Illinois law might require enforcement of its arbitration clause, enforcing Empire‟s choice-of-law provision would result in substantial injustice. (Emphasis added)

The case is Samaniego v. Empire Today LLC.

I’ll Bet You Thought That the Extra Hour of Pay in California Labor Code 226.7 Always Counts As Wages

Labor Code § 226.7 makes it unlawful for California employers to “require” that its employees “to work during any meal or rest period mandated by an applicable order of the Industrial Welfare Commission,” and states that employers who break the law must pay each such employee “one additional hour of pay … for each work day that the meal or rest period is not provided.”

Buzz has no intention of working during his meal break.

The California Supreme Court had famously addressed this statute in its landmark Murphy decison (Murphy v. Kenneth Cole Productions, Inc. (2007) 40 Cal.4th 1094 (2007)). In Murphy, the Supreme Court held that this same extra hour of pay constituted “wages” for purposes of determining what statute of limitations applied, and as a result, the more generous limitations period for “wages” was held applicable.

Today, in Kirby v. Irmoos Fire Protection, Inc., the California Supreme Court has once again turned its eyes towards Labor Code § 226.7, this time to deterimine whether a prevailing party in a Section 226.7 lawsuit also gets their attorneys’ fees paid. A different section of the Labor Code (Section 218.5) provides that prevailing parties get their fees “[i]n any action brought for the nonpayment of wages.” Ahh, wages. Seems simple enough. We’ve read Murphy, and we know that this extra hour of pay is treated as “wages,” right?

Insert deep sigh here.

The Supreme Court has now held that a lawsuit brought pursuant to Section 226.7 on account of meal/rest break violations is not a lawsuit brought for the “nonpayment of wages,” and for this reason the attorneys’ fee statute is simply inapplicable (and thus there is no means by which prevailing parties can recover their fees in meal/rest break lawsuits under Labor Code Section 226.7):

Section 226.7 is not aimed at protecting or providing employees’ wages. Instead, the statute is primarily concerned with ensuring the health and welfare of employees by requiring that employers provide meal and rest periods as mandated by the IWC. [Citations.] When an employee sues for a violation of section 226.7, he or she is suing because an employer has allegedly “require[d] [the] employee to work during [a] meal or rest period mandated by an applicable order of the Industrial Welfare Commission.” (§ 226.7, subd. (a).) In other words, a section 226.7 action is brought for the nonprovision of meal and rest periods, not for the “nonpayment of wages.”

And if you are interested to see how the Supreme Court dealt with the apparent contradiction between this new holding and its prior Murphy decision, here you are:

It is true that the remedy for a violation of the statutory obligation to provide IWC-mandated meal and rest periods is “one additional hour of pay at the employee‟s regular rate of compensation for each work day that the meal or rest period is not provided.” (§ 226.7, subd. (b).) It is also true that we held in Murphy that this remedy is a “wage” for purposes of determining what statute of limitations applies to section 226.7 claims. (Murphy, supra, 40 Cal.4th at p. 1099.) IFP contends that because the remedy sought by plaintiffs is a wage, the present action is an “action brought for nonpayment of wages” within the meaning of section 218.5 [the attorneys’ fee statute — Ed.] We disagree.

As a textual matter, we note that section 218.5 uses the phrase “action brought for” to mean something different from what the phrase means when it is coupled with a particular remedy (e.g., “action brought for damages” or “action brought for injunctive relief”). An “action brought for damages” is an action brought to obtain damages. But an “action brought for nonpayment of wages” is not (absurdly) an action to obtain nonpayment of wages. Instead, it is an action brought on account of nonpayment of wages. The words “nonpayment of wages” in section 218.5 refer to an alleged legal violation, not a desired remedy.

Nonpayment of wages is not the gravamen of a section 226.7 violation. Instead, subdivision (a) of section 226.7 defines a legal violation solely by reference to an employer’s obligation to provide meal and rest breaks. … The “additional hour of pay” provided for in subdivision (b) is the legal remedy for a violation of subdivision (a), but whether or not it has been paid is irrelevant to whether section 226.7 was violated. In other words, section 226.7 does not give employers a lawful choice between providing either meal and rest breaks or an additional hour of pay. An employer’s failure to provide an additional hour of pay does not form part of a section 226.7 violation, and an employer‟s provision of an additional hour of pay does not excuse a section 226.7 violation. The failure to provide required meal and rest breaks is what triggers a violation of section 226.7. Accordingly, a section 226.7 claim is not an action brought for nonpayment of wages; it is an action brought for non-provision of meal or rest breaks. [Ed. note – emphasis is mine].

So at least that’s cleared up now.

The Supreme Court in Kirby also held that the meal/rest break penalty did not invoke the “one way” plaintiff’s-only attorneys’ fees provision in Section 1194 of the Labor Code for lawsuits in which the employee is seeking “the legal minimum wage or the legal overtime compensation,” for the simple reason that a lawsuit to seek the penalty wage mentioned in Section 226.7 isn’t seeking either unpaid minimum wage or overtime.

For employers, the substantive holding in Kirby – that no prevailing party, plaintiffs included, is automatically entitled to prevailing party attorneys fees in a Labor Code 226.7 lawsuit – should be heartening. There is now somewhat less of an incentive for plaintiffs to bring meritless meal/rest break claims in the hopes that the claim might slide by and get through to trial. (Not that anyone actually attempts to do such things, of course.) Yet it is always a bit jarring to have seemingly settled questions of law upended.

California Supreme Court: Employers Must Offer Meal Breaks, But Need Not Ensure That Employees Actually Take Them

Yum. If it’s meal time, then your employees – at least those willing to toss their artery-clogging consciences to the wind – may very well want to emulate the gentleman above.

And, at least in California, it is now (finally) clear what your employer’s responsibility is concerning meal breaks.

Courts have been befuddled in California for some time concerning meal breaks. Specifically, what happened if your boss told you to take a meal break, but you got busy and forgot and worked through all or part of the break? Does the mere fact that your boss told you to go on break mean that the company has satisfied whatever obligation it might have had to provide you with a break (assuming, of course, that your boss didn’t pester you to keep working during the break)? If so, then you might be out of luck.

Or, on the other hand, is the company’s duty to actually make sure you take a meal break when you are supposed to? If this is the case, then legions of employees in various industries, who performed a spot of work here and there during meal breaks, might have claims against their employers, and legions of plaintiffs’ wage-and-hour attorneys start licking their chops. (As if there’s not enough of that.) One wonders what a company must do to fulfill such a requirement, if it indeed were a requirement. Do they tail you to the In-N-Out?

After years of waiting, the California Supreme Court has finally answered this question for us in Brinker Restaurant Corp. v. Superior Court. The Court was nice enough to summarize its key holding right at the very beginning of the 54-page opinion:

an employer’s obligation [to provide a meal break] is to relieve its employee of all duty, with the employee thereafter at liberty to use the meal period for whatever purpose he or she desires, but the employer need not ensure that no work is done. 

The Court elaborated upon this holding a little later in the opinion (at pp. 36-37):

An employer’s duty with respect to meal breaks under both [Labor Code] section 512, subdivision (a) and [IWC] Wage Order No. 5 is an obligation to provide a meal period to its employees. The employer satisfies this obligation if it relieves its employees of all duty, relinquishes control over their activities and permits them a reasonable opportunity to take an uninterrupted 30-minute break, and does not impede or discourage them from doing so. What will suffice may vary from industry to industry, and we cannot in the context of this class certification proceeding delineate the full range of approaches that in each instance might be sufficient to satisfy the law.

On the other hand, the employer is not obligated to police meal breaks and ensure no work thereafter is performed. Bona fide relief from duty and the relinquishing of control satisfies the employer’s obligations, and work by a relieved employee during a meal break does not thereby place the employer in violation of its obligations and create liability for premium pay under Wage Order No. 5, subdivision 11(B) and Labor Code section 226.7, subdivision (b). [Ed. note: emphasis is mine]

The underlined language is key, in my opinion, and is what most California employers will focus on. So long as you give your employees meal breaks when required, and legitimately relieve them of all responsibility and let them do essentially whatever they want (the employee must be “at liberty to use the meal period for whatever purpose he or she desires”), you are not at risk of a meal break penalty merely because your employees might start working to some degree during their breaks. As the Court put it, “Proof an employer had knowledge of employees working through meal periods will not alone subject the employer to liability for premium pay; employees cannot manipulate the flexibility granted them by employers to use their breaks as they see fit to generate such liability.”

This holding creates a few new issues, however. California employers who have handbook policies that limit what employees can do during meal breaks might want to rethink those policies, since tying the employee’s hands and requiring them to take all breaks in the breakroom, etc., may not be wise, since it might not satisfy the “at liberty to use the meal period for whatever purpose he or she desires” requirement. California employers might also want to think about whether they should direct supervisors and managers to simply stay out of the breakroom (unless they are on breaks themselves), since a rather glaring hole in this holding is the possibility that employees might allege that their bosses coerced or pressured them into working, and those allegations become more feasible the more frequently supervisors start visiting the breakroom. The court even mentioned this possibility by stating that “an employer may not undermine a formal policy of providing meal breaks by pressuring employees to perform their duties in ways that omit breaks.”

The Brinker court addressed various issues regarding class certification, how to calculate when rest and meal breaks must be given, etc., but the issue above what was everyone was waiting to see resolved.

California Court: Recruiters Qualified for "Commissioned Salesperson" Exemption

A California Court has held that a group of recruiters qualified for California’s commissioned salesperson exemption.

Here’s how the court described what these recruiters did to earn their keep:

Appellants’ primary job duty was to recruit “candidates” for employer “clients.” Surrex’s clients would place “job orders” with Surrex and appellants would search for potential candidates to fill the job orders. Appellants would use various resources to find candidates, including an internal database that Surrex maintained and various “on-line job boards.” Appellants would then attempt to convince both the candidate and the client that the placement of the candidate with the client was a proper fit.

The recruiters sued their employer, arguing that they were owed unpaid overtime. However, these particular employees were subject to IWC Wage Order 7, and under that Order, you don’t get overtime if you’re a bona fide “commissioned salesperson.” The company argued that these recruiters were commissioned salespersons, and the trial court agreed, throwing the claim out. The Court of Appeals has now affirmed that result.

Under California law, you don’t qualify for the commissioned salesperson from overtime unless – get this – you’re a salesperson and you get paid on commission.

The court held that these recruiters were indeed principally engaged in selling a service by scrounging up job candidates and convincing them to come work for the company’s clients:

appellants’ job, reduced to its essence, was to offer a candidate employee’s services to a client in exchange for a payment of money from the client to Surrex. Offering a candidate’s employment services in exchange for money meets the ordinary definition of the word “sell”… Further, Surrex presented evidence and testimony that appellants engaged in what is commonly thought of as sales-related activity — that is, they attempted “to persuade or influence [clients] to a course of action or to the acceptance of something.” [Citation]. Finally, it is undisputed that Surrex did not obtain any revenue unless and until an employer client selected a candidate proffered by a consulting services member. Thus, it was only upon the successful placement of a candidate that Surrex recorded a sale, and that a Surrex client became a paying client.

The court nixed the recruiter’s counter-argument that tasks such as trolling the Internet for potential job candidates, reviewing resumes, etc., shouldn’t count as time spent “selling”:

This argument perceives the word sales in a vacuum contrary to the job description of any salesman. The whole point of these activities, including online search for candidates, resume reviews, unsolicited (cold) calls, etc., are the essential prerequisites necessary to accomplishing the sale.

Finally, the court concluded that these recruiters were indeed paid a bona fide commission. The recruiters received a percentage of the money paid by the company’s clients for candidates – but this percentage was then run through a mathematical formula based on the company’s “adjusted gross profit” relative to the sale. In essence, the lower the company’s costs associated with the sale, the higher a percentage of that sale the recruiter would receive as payment. The recruiters objected, claiming that this couldn’t qualify as a bona fide commission system because it wasn’t a “straight” commission and it was “too complex.” The court rejected this argument, stating in essence that nothing in earlier California decisions required a straight commission system in all circumstances.

The case is Muldrow v. Surrex Solutions Corp.

Image: graur razvan ionut, freedigitalphotos.net

California Court: Personal Attended Exemption Not Destroyed by Performance of Health Care Services

If there was ever an appropriate name for an overtime plaintiff, it is Joy Cash.

Ms. Cash, however, will not be getting any cash, as she has lost her lawsuit – a lawsuit that she had brought against Iola Winn, a disabled, housebound 94-year-old-woman, who had the unmitigated gall to deny Ms. Cash overtime pay for the time that Ms. Cash spent cooking and shopping for her, dressing her, keeping her company (including sleeping in her home at night), and reminding her to take her medications.

Importantly for purposes of the lawsuit, Ms. Cash also claimed to regularly perform what she described as “health care services”: she claimed that she would massage Ms. Winn’s legs on a “daily” basis, check Ms. Winn’s “vital signs” by “feeling Winn’s pulse while she was having a ‘panic attack,'” check Ms. Winn’s oxygen levels “by observing ‘blueness in [her] finger'”, testing Ms. Winn’s blood sugar using an over-the-counter kit, and driving Ms. Winn to her doctors’ appointments. Importantly, Ms. Cash’s training was only in massage therapy and nutrition. She was not a registered nurse, a registered dietician, or a doctor, or a licensed medical professional of any kind. (The court did note, though, that Ms. Cash claimed to be knowledgable in “Chinese medicine.”)

Ms. Cash claimed that these latter duties meant that she could not be considered an exempt “personal attendant” under IWC Wage Order 15 (which governs “Household Occupations”), and that as a result she was entitled to overtime for all of that time she spent sleeping in Ms. Winn’s house. Amazingly, a jury agreed with Ms. Cash (aided by a flawed jury instruction – see below), and smacked this elderly woman with a $123,205.80 judgment, including a statutory attorney fee award of more than $70,000.

A Court of Appeals has now reversed this judgment and directed that judgment be entered in favor of Ms. Winn.

The case turned on whether the performance of even a small amount of “health care services” disqualified someone from being an exempt “personal attendant.” Here’s how Wage Order 15 defines a “personal attendant”:

“Personal attendant” includes baby sitters and means any person employed by a private householder … to work in a private household, to supervise, feed, or dress a child or person who by reason of advanced age, physical disability, or mental deficiency needs supervision. The status of “personal attendant” shall apply when no significant amount of work other than the foregoing is required.

Yet, the trial court had issued a jury instruction which added an additional limitation on “personal attendants” – according to this instruction, nobody could qualify as an exempt personal attendant if they performed…

health care services such as the taking temperatures or pulse or respiratory rate, or similar health care functions, or the administration of prescription medication other than medication ordinarily self administered by an individual, regardless of the amount of time such duties take. [Ed. note – emphasis is mine.]

This was wrong, according to the Court of Appeals. It noted that there was “no California case law supporting” the notion that the mere performance of “health care functions” disqualified one from being an exempt personal attendant, even if it is done regularly. “The court held that Wage Order 15 “cannot be reasonably interpreted to mean that the employee falls outside the definition [of “personal attendant”] if the employee regularly engages in a single ‘health care’ related task (including ‘taking temperatures or pulse or respiratory rate’), regardless whether these services are an incidental or minor part of the caretaker’s work.”

The Court of Appeals also noted that the trial court’s instruction offended California public policy concerning personal attendants, “which seeks to control homecare costs for elderly individuals who need help with daily living activities and thus avoid the need for institutionalization, while maintaining the overtime pay requirements for all other types of domestic work.” Indeed, if the trial court’s instruction were given any weight, pretty much nobody could qualify as a “personal attendant”:

An in-home caretaker’s work providing assistance to elderly individuals who cannot care for themselves will almost always involve some form of health care related function. Even where the caregiver’s main job is to provide assistance with day-to-day activities, it would be difficult to conceive of a situation where the employee had no responsibility for any tasks related to the health of the elderly individual. If we were to recognize a blanket exception to the personal attendant exemption for a caregiver who regularly engages in any regular health care related tasks (including tasks generally performed by family members such as checking a pulse rate or taking a temperature or helping with medication) regardless of whether the services are incidental to the main caretaking job, the personal attendant exemption would be eliminated with respect to care for elderly persons. The IWC would not have intended this result.

Ms. Cash had argued that the trial court’s instruction was founded upon DLSE opinion letters, but the Court of Appeals held that her reliance on the DLSE opinion letters was misplaced because the letters offered no support for her proposed interpretation of Wage Order 15.

And since the jury had otherwise found that Ms. Cash’s “primary duties involved supervising, feeding and dressing Winn, and that the other duties (such as health care related functions) were not a major or significant part of the job,” there was nothing else for the Court of Appeals to do but to direct that judgment be entered in Ms. Winn’s favor. And there was much rejoicing – a $123k judgment reduced to nothing with the turn of a pen, or however else the Court of Appeals releases its opinions these days.

Finally, for those Tidewater junkies among you – and you know who you are – the Court held that the DLSE opinion letters were not void on their face merely because they were issued without formal APA rulemaking procedures: “We agree that a DLSE opinion letter is not void on its face merely because it was issued without following the APA rulemaking provisions. Unlike DLSE interpretive policies, advice letters are not subject to the rulemaking provisions of the APA because they generally reflect an opinion on enforcement of the wage orders with respect to a specific factual circumstance.” [For the uninitiated, check out Tidewater Marine Western, Inc. v. Bradshaw (1996) 14 Cal.4th 557.]

The case is Cash v. Winn.