In Otsuka v. Polo Ralph Lauren Corp., a federal district court in Northern California recently approved a $4 million class action settlement for unpaid wages. Plaintiffs alleged that, as part of the retailer’s loss prevention program, they were required to submit to inspections of their personal bags and belongings before exiting the store. However, the inspections occurred after the employees had already clocked out. The settlement will compensate as many as 6,700 class members for the off-the-clock time waiting for and submitting to these bag inspections.    Employers are cautioned against retaining control over employees after the employee has clocked out.  Retaining sufficient control over what the employee does after clocking out, may amount to nothing short of forcing the employee to work off the clock, thereby entitling the employees to back pay, penalties and attorneys fees.

I discussed the importance of properly classifying those in your workplace (i.e., employee or independent contractor) in this older post.

Matthew Nelson of Dinsmore & Shohl writes here that UPS just entered into a $12.8 million settlement in a case dealing with the improper classification of their northern California drivers. He writes that “[t]he drivers claimed they were wrongfully classified as independent contractors rather than regular UPS employees, and as a result, were denied the benefits and protections of, among other things, the Fair Labor Standards Act (“FLSA”). Particularly, the drivers focused on the FLSA’s minimum wage and overtime guarantees.”

The drivers alleged that UPS controlled almost every aspect of the working relationship; including, delivery times for packages, that UPS dictated the drivers’ dispatches, set the prices, and even controlled what the drivers wore. Essentially, the drivers claimed they were such an integral part of UPS’s business, that they could not be said to have any separate or distinct business of their own. The court allowed the case to proceed as a class action, and the group eventually included roughly 2,400 UPS delivery drivers. Mr. Nelson also notes that “UPS denied the allegations, but eventually agreed to settle the case for $12.8 million (the settlement received provisional approval, but must still receive final approval from the court).”

If you are an employer utilizing independent contractors in your business, make sure that the classification is correct and that you aren’t simply postponing liabilities to a later point time.

You must properly classify those in your workplace (employee v. independent contractors)

California Labor Code §2802 requires an employer to indemnify (reimburse) its employees for all necessary expenses or losses incurred in the course of his or her duties. This includes an employee’s expenses when an employee uses their own vehicle for business purposes. Many employers reimburse their employees on a per mileage basis for use of their own vehicle during business errands.  The reimbursement is used to cover the costs (fuel, insurance, etc..) associated with the use of the vehicle for non-personal use.  However, many employers are not sure what mileage reimbursement rate they should use in making the reimbursement calculation.

While there is no specific reimbursement rate provided for in the Labor Code, there is guidance on the matter in both the Opinion Letters issued by the California Department of Labor Standards Enforcement (DLSE) and Labor Code Section 2802.

The DLSE has stated in its manual and opinion letters that it in the absence of other “evidence to the contrary” it will consider the use of the IRS mileage allowance rate as satisfying the requirement that the employer reimburse the expense’s incurred in use of an employee’s car. Businesses using the IRS mileage rate for calculating reimbursements should therefore be safe from under reimbursing their employees and violating Labor Code Section 2802.

On December 23, 2009, the Internal Revenue Service (“IRS”) issued the mileage rates used to calculate the deductible costs of operating an automobile for business purposes in 2010. Beginning on January 1, 2010, the mileage rates for the use of a car (also vans, pickups or panel trucks) will be $.50 cents per mile for business miles driven.

Failing to reimburse your employees at the proper rate subjects the business to a potential lawsuit, which could seek damages for the amount not properly reimbursed, interest from the date on which the employee incurred the necessary expenditure or loss ,and the employee may also seek all reasonable costs (including attorney’s fees incurred by the employee enforcing the rights granted by Labor Code §2802).

Double check the rates you are using when reimbursing employees for use of their personal vehicle for business purposes.

Apparently, there is a new set of class action cases that have been filed recently against several large employers for alleged “seating” violations under the California Labor Code (“Labor Code”). In these cases, plaintiffs seek to enforce Section 14 of the relevant Industrial Welfare Commission (“IWC”) Wage Orders, which until recently was a largely unnoticed provision of the Order that requires employers to provide seating for their employees under certain circumstances. While past case law gave employers some comfort, a new Northern District of California decision, Curie-White v. Blockbuster, has expanded damages available to plaintiffs in such cases, and will likely lead to further claims being filed.

Section 14 of IWC Wage Order 7 (entitled “Seats”), which is typical of several other industry specific wage orders, requires that (a) all workers shall be provided with suitable seating when the nature of the work reasonably permits it; and (b) when the nature of the work requires standing, the employer must provide reasonable seating in proximity to the work area and employees shall be permitted to use such seats when it does not interfere with the performance of their duties.  However, Section 14 does not contain its own penalty provision and does not address seating claims.

The new class action claims assert that employers who fail to comply with Wage Order seating requirements violate Section 1198 of the Labor Code, which makes it illegal to employ an employee under conditions that are prohibited by an IWC Wage Order.  These new seating claims have been brought under the Private Attorneys General Action of 2004 (“PAGA”), which allows recovery for violations of all provisions of the Labor Code except those for which a civil penalty is specifically provided.  PAGA penalties consist of $100 for each aggrieved employee per pay period for the first violation, and $200 for each aggrieved employee per pay period for each subsequent violation.

Prior to the decision in Curie-White v. Blockbuster, the only court opinion to address a seating claim was in Hamilton v. SF Hilton and the decision there weighed heavily in favor of the employer.   However, In Curie-White, the court significantly undermined several of the key defenses that had succeeded in the Hamilton case.  Most significantly, the court ruled that plaintiffs may seek civil penalties under PAGA because the penalty provision of the Wage Order “does not provide a penalty for the violation…specifically a failure to provide seats for employees.”

Given the conflict between the Hamilton and Curie-White decisions, it is likely that the issue will continue to be litigated in the more recent seating claims cases.  The ultimate resolution in those cases will likely determine whether the these seating claims form a new fad in class action litigation.

WHAT TO DO:

• Document any efforts that have been made to determine whether seats are necessary;

• Review and analyze current job descriptions and customer service standards to determine whether they clearly identify jobs where continual mobility and standing are essential functions of the job, and incorporate those standards into the job descriptions;

• Provide an adequate number of suitable seats in a nearby break room and allow employees to use the seats when it does not interfere with the performance of their duties.

Here is a link to Wage Order 7, which contains the relevant Seating Requirements at Section 14

Is there a new wave of Class Action cases coming in California?

Craig Etter and Phillip Pillar of Greenberg Traurig, LLP have posted an article that suggessts IRS workplace audits will increase beginning in 2010.  A portion of their article, reprinted by the Association of Corporate Counsel, is copied below, with a link at the end of this post directing you to the complete article with footnotes.

Internal Revenue Service Will Conduct Thousands of Random Employer Audits Beginning in 2010 Internal Revenue Service (IRS) officials recently stated that the IRS will randomly audit approximately 6,000 U.S. employers for employment tax compliance and proper worker classification. According to reports, the audits will begin in February 2010 and are expected to be completed within three years.1

The IRS intends to audit employers of all sizes and types, including non-profit organizations. The audits are part of the IRS’ National Research Program and have a two-fold purpose, (1) to generate revenue from non-compliant employers and (2) to serve as a statistical sample of employers that are in compliance while identifying areas of non-compliance and techniques used to avoid employment taxes.

The IRS expects to test how much of the estimated $15 billion “tax gap” attributed to employment taxes actually exists and may be closed.2 Also, the IRS expects the statistical evidence will help determine whether legislative or enforcement changes are necessary to address common employment tax evasion techniques.3 As a result, the audits are expected to be exhaustive and will concentrate on five employment tax issues:

1. worker classification,
2. fringe benefits,
3. non-filers,
4. officers’ compensation and
5. employee expense reimbursements.4

While the audits will begin with the examination of federal employment tax returns (Forms 941), the process will involve many other documents that pertain to the employers’ practices in these five areas.

A major focus of the audit will be on employers that have improperly classified their workers as independent contractors instead of employees. There are many temptations to misclassify workers: (a) shifting the cost of employment taxes to workers, (b) avoiding employee benefit costs, and (c) eliminating responsibilities under employment laws, such as civil rights or wage and hour laws. However, employers who misclassify their workers as independent contractors risk significant tax liabilities upon detection by the IRS, even if the employee paid the employment taxes due.5

Other issues that may be raised include proper treatment of (i) fringe benefits and per diems as tax-free, rather than as compensation subject to income and employment taxes, (ii) employee expense reimbursements that must comply with accountable plan rules for exclusion from employees’ gross income and (iii) executive compensation as reasonable in amount. The wide-ranging audit program is part of a trend to crack down on employment tax non-compliance, which includes heightened enforcement at the federal level6 and an increasing number of states sharing information with the IRS regarding questionable tax practices.7 Employers of every size and type should realize that their compliance with federal employment tax obligations may be scrutinized, and that they should review their compliance programs with their tax advisors before the audits begin.

For the full article with footnotes, click here.

For tax withholding changes that were effective November 1st – check this post too.

For help with compliance check out this post on hiring outsourced general counsel.

Plaintiffs, in Stuart v. RadioShack, sought reimbursement for expenses related to use of their personal vehicles to perform inter-company store transfers, which vehicle use was known by the employer even though the employees had not followed proper internal procedures for requesting reimbursement. The issue before the court was whether an employee must first make a proper request for reimbursement with his or her employer before the employer’s duty to indemnify under Labor Code section 2802 is triggered.

California Labor Code section 2802 provides that “An employer shall indemnify his or her employee for all necessary expenditures or losses incurred by the employee in direct consequence of the discharge of his or her duties.”  And Section 2804 further provides that “Any contract or agreement, express or implied, made by any employee to waive the benefits of this article or any part thereof, is null and void.”

The Court addressed the question of what happens when an employee does not report the expense according to company policy, and held, in effect, that the requirements of the statute must override any internal reimbursement rules set by the employer. California employees have a right to be reimbursed for their work related expenses, such as business travel, equipment, materials, and training, when the employer knows or has reason to know that the employee has incurred the expense, even when the employee fails to follow internal reimbursement protocol established by the employer.

Employers should continue to create policies and procedures for expense reimbursement; however, they should also recognize that they remain liable to reimburse the employee’s expenses even when the employee fails to adhere to the exact terms of the reimbursement policy. Case law now provides that the employee’s failure to follow company reimbursement protocol will be an unlikely defense for employers who fail to make a valid reimbursement required under Labor Code 2802.

Employers, please remember that you need to keep on top of your non-exempt employees about taking their statutorily required meal and rest periods.  You should have a copy of the wage order that governs your place of business (get it here) and review it every now and then to be sure you are still keeping up on the wage and hour compliance issues discussed in the orders.

For meal periods: Remember that no employer shall employ any person for a period of more than five (5) hours without providing them with a meal period of not less than 30 minutes, except that when the person is working less than 6 hours a day the employee may waive the meal period. The waiver, however, must be in writing, signed by the employee and in the personnel file ahead of time. The employee has the right to revoke the wavier too.

For days when the employee will be working more than 10 hours, the wage order requires you to provide a second 30 minute meal period for the employee, except that if the total hours worked will not be more than 12 hours for the day, the employee may waive the second meal period if they actually took the first meal period and have a signed waiver in their file ahead of time.

Unless the employee is relieved of all duty during a 30 minute meal period, the meal period will be considered an “on duty” meal period and counted as time worked. An “on duty” meal period is only allowed only when the nature of the work prevents an employee from being relieved of all duty and when by written agreement between the parties an on-the-job paid meal period is agreed to. The written agreement shall state that the employee may, in writing, revoke the agreement at any time.

If you fail to provide your employee with a meal period as outlined above, you are required to pay the employee one (1) hour of pay at the employee’s regular rate of compensation for each workday that the meal period is not provided. These penalties can add up fast so you need to make sure your employees are tracking their time worked, their meal periods, and whether they missed the meal period. You should also be tracking when you paid them the one hour penalty, which should be right away after finding out about any missed meal period.

Similar to the meal periods (except rest periods are paid breaks), every employer shall authorize and direct that all employees take a rest period, which insofar as practical should be in the middle of each work period. The authorized rest period time shall be based on the total hours worked daily at the rate of ten (10) minutes net rest time per four (4) hours or major fraction thereof.  However, a rest period need not be authorized for employees whose total daily work time is less than three and one-half (31/2) hours. If you call someone off break before the get their net 10 minutes, you should give them a new 10 minute break after whatever necessity that required they be called back to duty has ended.

Like the one hour penalty in the meal period context, if an employer fails to provide an employee a rest period in accordance with the applicable provisions of the wage order, the employer shall pay the employee one (1) hour of pay at the employee’s regular rate of compensation for each workday that the rest period is not provided.

Often times the employer feels bad about disciplining the employee who works through a meal period because they are simply trying to work hard. Let them know that its nothing personal (you are not trying to punish hard work), but as the employer you can be held liable for missed meal and rest periods, so they must take them or face discipline.  You can and should discipline employees who do not adhere to company policy regarding the tracking and taking of meal and rest periods.

Employers, please remember that section 5 of most, if not all, of the Industrial Welfare Commission Wage Orders (available for download here) provides that an employee shall be paid, as Reporting Time Pay, half of their usual or scheduled day’s work (not less than two (2) hours, nor more than four (4) hours) at the employee’s regular rate of pay whenever the employee is required to report for work and is not put to work, or is given less than half of the employee’s usual or regularly scheduled day’s work.

Also, where the employee is required to report for work a second time in any one workday and is furnished less than two (2) hours of work on the second reporting, the employee should be compensated for two (2) hours at the employee’s regular rate of pay.

The Reporting Time Pay is not applicable when:

(1) Operations cannot commence or continue due to threats to employees or property; or when recommended by civil authorities; or
(2) Public utilities fail to supply electricity, water, or gas, or there is a failure in the public utilities, or sewer system; or
(3) The interruption of work is caused by an Act of God or other cause not within the employer’s control.

Reporting Time Pay is also not applicable for employee on paid standby status who are called to perform assigned work at a time other than the employee’s scheduled reporting time.

For some compliance tips on meal and rest periods – check out this post too.

Employers should be aware that as of November 1, 2009, they will be required to use a new state income tax withholding table, which increases  by 10% the amount of income taxes withheld based on existing claimed exemptions by the the employee.

For example, if state income tax withholding is currently $400 a pay period on an employee’s regular wages, come November 1st , the withholding will increase to $440.

Payroll departments should be prepared to receive employee inquires and amended w-4 forms after the effective date.

This new change was part of legislation (ABX4-17) signed by the Governor to assist in accelerating tax collection due to the budget crisis at the State level (I know,  not just at the State level).

Littler has a more exhaustive posting on the topic here if you would like more information on this tax issue.

Change in CA Tax Withholding Tables Effective November 1, 2009

Recently, in Johnson v. Arvin Edison Water Storage Dist. (2009) 174 Cal.App.4th 729, the 5th District Court of Appeal in California held that a water district, which is a municipal corporation organized as a sort of quasi-governmental entity for the purpose of storing and delivering water to its community, is in fact exempt from the more stringent State overtime and meal period regulations contained in the California labor code.

The plaintiff argued that the water district was  not only subject to the Fair Labor Standards Act (FLSA – 29 U.S.C. Section 201, et seq.), but also to the more stringent wage and hour regulations contained in the California Labor Code, unless expressly exempted in the code itself.  According to the Plaintiff, under statutory construction rules, the Legislature intended that water storage districts provide their employees with overtime and meal periods in conformance with Labor Code Sections 510 (OT provision) and 512 (meal period provision), and the relevant IWC Wage Order. Plaintiff argued that these Labor Code requirements do not infringe on the execution of the District’s sovereign powers.

The plaintiff also stated that the District was not exempt as a “municipal corporation” under Section 220 of the Labor Code, which would have required the district to immediately pay wages due upon an employee’s termination or resignation under sections 201 and 202 and for penalties for failure to do so under section 203.

In affirming the judgment that dismissed the plaintiff’s complaint, the Court held that unless the Labor Code provisions are specifically made applicable to public employers, they only apply to employers in the private sector. Pointing out that because sections 510 and 512 of the Labor Code do not expressly apply to public entities, they are not applicable to water districts.

Additionally, the Court noted that applying sections 510 and 512 of the Labor Code to the District would infringe on its sovereign power to regulate its workforce and would violate the established rule recognized by the Legislature, that public entities are not subject to a general statute unless expressly included.  Finally, the court clarified that a Water District is a “municipal corporation” as that term is used in the Labor Code and, therefore, exempt from Sections 201, 202 and 203.

Although not as stringent as California wage and hour requirements, the water district employees are not without some protection, such districts should still comply with wage and hour laws set forth in the FLSA.

California employers who order their labor posters and postings from the various sources out there, should also be aware and remember that the Employer is also required to post a copy of the appropriate Wage Order from the Industrial Welfare Commission of the California Department of Industrial Relations.  Do not forget this component of the California posting requirements.

When hiring someone to complete a project or series of tasks for you, it is sometimes tempting for the person doing the hiring to classify that worker as an independent contractor.  It is cheaper for the person doing the hiring because employment taxes do not have to be paid, certain insurance requirements do not have to be met, and certain benefits do not have be provided. Also the employer may not have to comply with wage and hour laws (i.e., overtime, meal and rest periods, reporting time pay, etc..).

This is why some businesses go ahead and classify that new worker as an independent contractor rather than an employee. But just because the business classifies the worker as an independent contractor, does not mean the various regulatory agencies will do the same, and doing so may get the business in trouble.  Regulatory agencies favor the employee and the employee model of hiring for work.  The IRS and State Franchise Tax Board would also like for you to designate the person as an employee so you have to pay the employment taxes.  They lose countless amounts of money each year to underreported self employment income.

In order to stay out of trouble with the various regulatory agencies you need to weigh several factors (developed by case law) to determine whether the person is truly an independent contractor or an actual employee. You should keep records of the decision and why the decision was made. You want information in the file that will support your decision that the person really is an independent contractor, if you go with that classification.   Generally speaking, the more control you exert over the person, the more likely the person will be classified as an employee. If you direct their work, tell them when they have to report, pay for their tools or supplies, give them any training, set the hours of work, require they only work for you, and things of this nature, you have likely exerted sufficient control over the person for them to be classified as an employee.  If the person doing the work uses their own tools, can subcontract the work to someone else, can report to work on their schedule, does work for various other individuals or businesses, provides their own training, and does not have to report like other employees, tends to suggest the person is a true independent contractor.

There are other factors different agencies look at, and some safe harbor provisions an attorney can advise you about.

The IRS has a publication discussing worker classfications.  Visit the Department of Labor’s site for discussion related to proper classification here.  Finally, the Employment Development Department has an valuable resource here.

You should also have an independent contract agreement in place with anyone you designate as an independent contractor to recite all the facets of the agreement and memorialize the lack of control you have exerted over the person in terms of the business relationship.