Employment Law

California Supreme Court Provides Clarification When Calculating Overtime Rate

Why it matters

In an employee-friendly opinion, the California Supreme Court set forth the calculation of a worker’s overtime pay rate when he or she has earned a flat-sum bonus during a single pay period. Hector Alvarado claimed that Dart Container Corp. of California improperly computed his overtime pay. He argued that the employer should have used the actual number of nonovertime hours the employee worked during the relevant pay period as the divisor for purposes of calculating the per-hour value of the one-time “attendance bonus.” Dart moved for summary judgment, countering that the divisor should be the number of hours the employee worked during the entire pay period, including overtime hours. A trial court granted the motion in favor of the employer, and an appellate panel affirmed. The state’s highest court reversed, holding that the divisor should be the number of nonovertime hours actually worked by the employee during the pay period, a formula advocated by the state labor department. The California Supreme Court also indicated the decision would apply retroactively, presenting the need for employers to review their calculations both historically and prospectively.

Detailed discussion

A warehouse associate for Dart Container Corp. of California from September 2010 to January 2012, Hector Alvarado was one of many employees who received a weekend “attendance bonus.” Hourly workers were paid a flat sum of $15 per day of weekend work in addition to their normal hourly wages, regardless of whether the employee worked in excess of the normal work shift on the day in question.

To calculate an employee’s overtime compensation, Dart multiplied the number of overtime hours the employee worked during the relevant pay period by the normal hourly wage rate to obtain a base hourly pay for the overtime work. Dart then added the total hourly pay for nonovertime work during the pay period, any nonhourly compensation earned (such as the attendance bonus) and the base hourly pay. The employer divided that total by the number of hours the employee worked during the pay period, including overtime hours, to obtain an hourly rate. Dart then multiplied that hourly rate by the total number of overtime hours in the pay period, divided it in half and added the base hourly pay to the overtime to get the total overtime compensation for the pay period.

Alvarado advocated for a different formula. He would first calculate the overtime compensation attributable only to the employee’s hourly wages, multiplying the normal hourly wage rate by 1.5 and by the number of overtime hours. Next he would calculate the overtime compensation attributable only to the employee’s bonus by calculating the bonus’s per-hour value (based on the number of nonovertime hours worked) and then multiplying that per-hour value by 1.5 and by the number of overtime hours worked. Finally, Alvarado suggested combining these amounts to obtain the total overtime compensation for the pay period.

The key distinction: whether the flat-sum attendance bonus is allocated to all hours worked or only to the nonovertime hours worked. Using the latter as the divisor results in a more favorable calculation for employees.

After Alvarado filed a putative class action against Dart alleging the company’s calculations violated California labor law, the employer moved for summary judgment. In support of its formula, Dart advised the trial court to rely on a federal regulation explaining how to factor a flat-sum bonus into an employee’s regular rate of pay. The only California regulation on point came from the Division of Labor Standards Enforcement (DLSE), and that policy is void for failure to comply with the Administrative Procedure Act (APA), Dart argued.

The trial court granted the employer’s motion for summary judgment, and an appellate panel affirmed. In a unanimous opinion, the California Supreme Court reversed. The court began with the question of whether the DLSE’s enforcement policy controlled its analysis of Dart’s calculations. If it did, then the case was decided in favor of Alvarado. If it did not control, the court could nevertheless follow it.

In 1996, the California Supreme Court decided Tidewater Marine Western, Inc. v. Bradshaw, where the court found that DLSE’s manual contained void underground regulations in violation of the APA. Dart pointed to this decision as support for its reliance on federal regulations, but the court made a careful distinction.

“But ‘void,’ in this context, does not necessarily mean wrong,” the court said. “If the policy in question is interpretive of some governing statute or regulation, a court should not necessarily reject the agency’s interpretation just because the agency failed to follow the APA in adopting that interpretation; rather, the court must consider independently how the governing statute or regulation should be interpreted.”

In other words, an agency’s underground interpretive regulation should not be afforded any special weight or deference, but it is nonetheless something a court may consider, the court explained, and assuming the court is persuaded that the agency’s interpretation is correct, the court may adopt it as its own. “Moreover, the persuasiveness of the agency’s interpretation increases in proportion to the expertise and special competence that are reflected therein, including any evidence that the interpretation was carefully considered at the highest policymaking level of the agency.”

The DLSE manual addresses the precise calculation at issue. Section 49.2.2.2 states: “If the bonus is a flat sum, such as $300 for continuing to the end of the season, or $5 for each day worked, the regular bonus rate is determined by dividing the bonus by the maximum legal regular hours worked during the period to which the bonus applies. This is so because the bonus is not designed to be an incentive for increased production for each hour of work; but, instead is designed to insure that the employee remains in the employ of the employer.”

Although the court determined the DLSE policy is a void underground regulation, it also decided it was correct and could be followed.

The court then turned to Dart’s formula, with the recognition that California has a long-standing policy of discouraging employers from imposing overtime work and liberally construes labor laws in favor of worker protection.

Under the Labor Code and the Industrial Wage Commission orders, an employee’s overtime pay rate is a multiple of his or her “regular rate of pay.” The plain meaning of the phrase “regular rate of pay” does not mean “constant,” the court added, as an employee’s regular rate of pay changes from pay period to pay period depending on whether the employee has earned shift differential premiums or nonhourly compensation.

“[T]he weekend attendance bonus at issue here is payable even if the employee works no overtime at all during the relevant pay period,” the court said. “It follows, then, that the bonus is properly treated as if it were fully earned by only the nonovertime hours in the pay period, and therefore only nonovertime hours should be considered when calculating the bonus’s per-hour value.”

Returning to the DLSE policy, the court said the agency recognized an important distinction. “If a bonus is a reward ‘for each hour of work,’ and its amount therefore increases in rough proportion to the number of hours worked (as might be true of a production or piecework bonus or a commission), then it might be said that the payment of the bonus itself constitutes base compensation, including base compensation for overtime work, in which case one might be able to argue that only the overtime premium need be added,” the court said.

But the attendance bonus at issue does not reward the employee “for each hour of work,” and its amount did not increase in rough proportion to the number of hours worked; instead, it is a flat-sum bonus that rewards the employee for completing a full weekend shift. “Accordingly, we conclude—consistent with the DLSE’s policy on point—that the divisor for purposes of calculating the per-hour value of defendant’s attendance bonus should be the number of nonovertime hours actually worked in the relevant pay period, not the number of nonovertime hours that exist in the pay period,” the court said.

Dart’s formula “must be rejected because it results in a progressively decreasing regular rate of pay as the number of overtime hours increases, thus undermining the state’s policy of discouraging overtime work,” the court wrote.

Having sided with the plaintiff, the court then ruled its decision should have retroactive effect. Given the DLSE policy, the defendant “had every reason” to predict the outcome, the court said, not persuaded by the potential for costly civil penalties facing Dart and other employers.

“[I]f we were to restrict our holding to prospective application, we would, in effect, negate the civil penalties, if any, that the Legislature has determined to be appropriate in this context, giving employers a free pass as regards their past conduct,” the court wrote.

“We conclude that the flat sum bonus at issue here should be factored into an employee’s regular rate of pay by dividing the amount of the bonus by the total number of nonovertime hours actually worked during the relevant pay period and using 1.5, not 0.5, as the multiplier for determining the employee’s overtime pay rate.”

To read the opinion in Alvarado v. Dart Container Corp. of California, click here.

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NLRB’s Prior Joint Employer Standard Back in Effect

Why it matters

In a blow to employers, the National Labor Relations Board (NLRB) vacated its decision in Hy-Brand Industrial Contractors, Ltd., where the majority had reversed the “joint employer” standard adopted in Browning-Ferris Industries of California, Inc. In 2015, the NLRB adopted the Browning-Ferris standard that even when two entities have never exercised joint control over the essential terms and conditions of employment, and even when any joint control is not “direct and immediate,” the two entities will still be joint employers based on the existence of “reserved” joint control, or based on indirect control or control that is “limited and routine.” An administrative law judge applied the standard in a case involving Hy-Brand and Brandt Construction Co. and found the two entities were joint employers for purposes of the National Labor Relations Act when they terminated a total of seven workers. When the employer appealed to the NLRB, the board took the opportunity to toss Browning-Ferris and establish a new test. However, after the NLRB Inspector General determined that one of the new NLRB members on the Hy-Brand panel was disqualified from participating in the case and should have recused himself from the proceeding, the NLRB vacated its decision, leaving Browning-Ferris in place—at least for now.

Detailed discussion

In 2015, the National Labor Relations Board (NLRB) adopted a controversial new standard to determine the scope of joint employer liability in Browning-Ferris Industries of California, Inc. The board held that even when two entities have never exercised joint control over the essential terms and conditions of employment, and even when any joint control is not “direct and immediate,” the two entities will still be joint employers based on the existence of “reserved” joint control, or based on indirect control or control that is “limited and routine.”

Applying that standard to a case involving Hy-Brand Industrial Contractors and Brandt Construction Co., an administrative law judge determined the two entities were joint employers for purposes of the National Labor Relations Act when they terminated a total of seven workers.

When the employers appealed to the NLRB, it—complete with new members courtesy of President Donald J. Trump—took the opportunity to establish a new test.

“We find that the Browning-Ferris standard is a distortion of common law as interpreted by the Board and the courts, it is contrary to the Act, it is ill-advised as a matter of policy, and its application would prevent the Board from discharging one of its primary responsibilities under the Act, which is to foster stability in labor-management relations,” the Board majority wrote. “Accordingly, we overrule Browning-Ferris and return to the principles governing joint employer status that existed prior to that decision.”

The NLRB found five major problems with Browning-Ferris: (i) it exceeded the NLRB’s statutory authority; (ii) it based its rationale on an incorrect position that present conditions are unique to our modern economy; (iii) it effectively permitted the NLRB to rewrite the principles of agency; (iv) it abandoned a long-standing test that provided certainty and stability and replaced it with a vague and ill-defined standard; and (v) it applied the wrong remedy to a perceived inequality of bargaining leverage in collective bargaining relationships.

In overruling Browning-Ferris, the NLRB reinstated the prior joint employer standard for pending cases, with retroactive application.

“Thus, a finding of joint employer status requires proof that the alleged joint employer entities have actually exercised joint control over essential employment terms (rather than merely having ‘reserved’ the right to exercise control), the control must be ‘direct and immediate’ (rather than indirect), and joint employer status will not result from control that is ‘limited and routine,’” the NLRB wrote.

Applying the new test to the parties in the case, the NLRB found Brandt and Hy-Brand were still joint employers. “Substantial evidence supports a finding that the two entities exercised joint control over essential employment terms involving Brandt and Hy-Brand employees, the control was direct and immediate, and it was not limited and routine,” the NLRB said.

The decision was hailed by employers, but the victory was short-lived.

In a motion for reconsideration, for recusal and to strike, the charging parties requested that the NLRB vacate its decision and that board member William J. Emanuel recuse himself. The NLRB’s Inspector General launched an investigation into whether Emanuel was required to recuse himself because his former law firm represented Leadpoint, another entity involved in the Browning-Ferris case.

Given this conclusion, the NLRB vacated its decision. “After careful consideration … we have decided to grant the Charging Parties’ motion in part and to vacate and set aside the Board’s December 14, 2017 Decision and Order,” the remaining three members of the NLRB wrote. “Because we vacate the Board’s earlier Decision and Order, the overruling of the Browning-Ferris decision is of no force or effect.”

To read the memo from the Inspector General, click here.

To read the order in Hy-Brand Industrial Contractors, Ltd., click here.

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DOL Fines Foreign Contractors $14M

Why it matters

The Department of Labor (DOL) announced settlements with four foreign-based construction contractors with a total payment of $14 million for violations of the Fair Labor Standards Act in relation to the construction of the Saipan Casino and Hotel. MCC International Saipan Ltd. Co., Beilida New Materials System Engineering Co. Ltd., Gold Mantis Construction Decoration Co. Ltd. and Sino Great Wall International Engineering Co. Ltd. all failed to pay minimum wage and overtime as required by the statute, the DOL’s Wage and Hour Division found in an investigation. In addition, three of the companies also employed workers who arrived on Saipan with tourist visas and never obtained proper work visas, the DOL said. The four companies will pay roughly 2,400 Chinese workers a total of $13.9 million in back wages and damages. The settlements should serve as a warning to employers to follow all relevant laws, regardless of where work occurs, the DOL cautioned employers.

Detailed discussion

The Department of Labor (DOL) initiated a wide-ranging investigation into the ongoing construction of the Saipan Casino and Hotel on the island of Saipan in the commonwealth of the Northern Mariana Islands.

According to the DOL, investigators with the Wage and Hour Division (WHD) determined that four Chinese-based companies—MCC International Saipan Ltd. Co., Beilida New Materials System Engineering Co. Ltd., Gold Mantis Construction Decoration Co. Ltd. and Sino Great Wall International Engineering Co. Ltd.—failed to pay their workforce in accordance with the Fair Labor Standards Act.

Specifically, the companies paid more than 2,400 employees from China less than minimum wage and neglected to pay them overtime.

In addition, three of the four companies (MCC, Beilida and Gold Mantis) employed workers who were brought to Saipan under a tourist visa waiver program offered by the commonwealth of the Northern Mariana Islands. Despite being in the country on tourist visas, the individuals were employed at the site without the proper work visas, the DOL said. Required to pay for their own airfare and recruitment fees prior to coming to Saipan, these employees also incurred debt of $6,000 or more.

To settle the charges, the four companies entered into settlement agreements with the DOL to pay a total of $13,972,425 in back wages and liquidated damages to the employees. The companies—which contracted with Imperial Pacific International for the casino and hotel project—are only one piece of the WHD’s investigation, the DOL noted.

“These settlements ensure that thousands of workers will receive the wages they legally earned, while simultaneously sending a strong, clear message to other employers,” WHD Acting Administrator Bryan Jarrett said in a statement. “Employers who evade the law in an attempt to reduce expenses must not gain a competitive advantage over those who play by the rules. Regardless of where work is performed in the U.S. or its territories, we will continue to enforce the law and level the playing field.”

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New Employment-Related Bills in California

Why it matters

California lawmakers are considering new bills that would impact employers, ranging from an extension of the statute of limitations on unlawful discrimination to additional discrimination training and record-keeping requirements to a measure that would protect workers legally using medical marijuana. With the #MeToo movement still in full effect, several pieces of legislation address harassment and discrimination, including AB 1870. Pursuant to the proposed law, employees in California would have three years to file complaints of unlawful discrimination with the Department of Fair Employment and Housing, tripling the current one-year limit. A second measure, AB 2069, would create a new protected category under the Fair Employment and Housing Act: marijuana card holders. The proposed law would “prohibit an employer from engaging in employment discrimination against a person on the basis of his or her status as, or positive drug test for cannabis by, a qualified patient or person with an identification card.” While the bill would not protect users of recreational marijuana, it would present questions with regard to employee use of medical marijuana and reasonable accommodations.

Detailed discussion

A new measure pending in the California legislature would triple the statute of limitations for plaintiffs bringing harassment or discrimination claims. Currently, employees have one year to file a claim with the Department of Fair Employment and Housing (DFEH), which is required before filing a lawsuit pursuant to the Fair Employment and Housing Act (FEHA).

The Stopping Harassment and Reporting Extension Act would triple that time period to three years from the date on which the last discriminatory act occurred. “Violators should not be able to avoid accountability simply because a claim is not filed within 12 months,” Assemblywoman Marie Waldron (R-Escondido), one of the sponsors of the bill, said in a statement.

While a reflection of the current #MeToo movement, the proposed legislation is not limited to sexual harassment and includes all types of harassment and discrimination claims, opening the door to a much broader liability period for employers.

Not surprisingly, other bills addressing sexual harassment and discrimination are also in the works.

Assemblywoman Eloise Reyes (D-San Bernardino) introduced AB 1867, which would require employers with 50 or more workers to maintain records of sexual harassment complaints for 10 years from the date of filing, and Sen. Hannah-Beth Jackson (D-Santa Barbara) filed SB 1300, which would provide guidance to the courts on the “severe or pervasive” legal standard for sexual harassment and prohibit the use of nondisparagement clauses or releases that prevent employees from speaking out about harassment.

The measure also addresses training, requiring all employers to provide sexual harassment training to employees in California within six months of their being hired and once every two years—expanding the scope of the training mandated for employers with 50 or more workers, which are currently required to provide this training only to supervisory employees. In addition, the training would need to include “bystander intervention” education (teaching employees how to interrupt behaviors to prevent harassment) as well as details on how to report harassment and contact the DFEH to file a complaint.

In a different area of employment law, another proposed piece of legislation would establish protections for legal users of medical marijuana in the state. Pursuant to a 2008 decision from the California Supreme Court, Ross v. Ragingwire, employers are not required to accommodate medical marijuana use and can deny employment to users of marijuana, even in light of the Compassionate Use Act of 1996.

However, as the legal use of marijuana has continued to expand—with recreational use now legal in the state as of Jan. 1—the standard may be changing.

AB 2069 would amend FEHA to add “status as, or positive drug test for cannabis by, a qualified patient or person with an identification card” to the list of protected categories.

“The intent of the Legislature in enacting this act is to make it unlawful for an employer to discriminate against a person in hiring, termination, or any term or condition of employment or otherwise penalize a person if the discrimination is based upon the person’s status as a qualified patient or person with an identification card entitled to the protections of the Compassionate Use Act of 1996 or a positive drug test for cannabis by a qualified patient or person with an identification card,” according to the bill.

However, the measure “does not prohibit an employer from terminating the employment of, or taking other corrective action against, an employee who is impaired on the property or premises of the place of employment or during the hours of employment because of the medical use of medical cannabis.”

Nor would the statute “prohibit an employer from refusing to hire an individual or discharging an employee who is a qualified patient or person with an identification card … if hiring the individual or failing to discharge the employee would cause the employer to lose a monetary or licensing-related benefit under federal law or regulations.”

All of the bills are currently pending in committee.

To read AB 1870, click here.

To read 1867, click here.

To read SB 1300, click here.

To read AB 2069, click here.

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Transgender Worker Protected by Title VII, Sixth Circuit Rules

Why it matters

Siding with the Equal Employment Opportunity Commission, the U.S. Court of Appeals for the Sixth Circuit ruled that a Michigan funeral home was not protected from liability under Title VII for discriminating against a transgender employee. The agency filed suit in 2014, claiming that R.G. & G.R. Harris Funeral Homes violated the statute when it terminated Aimee Stephens two weeks after she announced her plans to transition from male to female, with the company’s owner informing her that what she was “proposing to do” was unacceptable. The funeral home argued that the Religious Freedom Restoration Act shielded it from liability, but the federal appellate panel disagreed, reversing summary judgment in favor of the employer. “Tolerating Stephens’s understanding of her sex and gender identity is not tantamount to supporting it,” the court wrote, and compliance with federal law does not equate with endorsing Stephens’s views. “The fact that [the owner] sincerely believes that he is being compelled to make such an endorsement does not make it so.”

Detailed discussion

Born biologically male, Aimee Stephens lived and worked as a funeral director at R.G. & G.R. Harris Funeral Homes while still living and presenting as a man. After working for the company for approximately five years, Stephens gave owner Thomas Rost a letter explaining that she has struggled with “a gender identity disorder” her “entire life.” She informed Rost that she intended to have sex reassignment surgery, and as a first step, would live and work as a woman for a period of one year.

Rost terminated Stephens, later testifying that he fired her because “he was no longer going to represent himself as a man. He wanted to dress as a woman.” Stephens filed a sex discrimination charge with the Equal Employment Opportunity Commission (EEOC), and the agency filed suit.

The EEOC charged the funeral home with violating Title VII by terminating Stephens’s employment on the basis of her transgender or transitioning status and her refusal to conform to sex-based stereotypes and by administering a discriminatory clothing allowance policy.

In its defense, the employer pointed to the Religious Freedom Restoration Act (RFRA), arguing that it precluded the agency from enforcing the statute against the funeral home because it would substantially burden Rost and the company’s religious exercise. God has called him to minister to grieving people, Rost said, and he believes that he would be violating God’s commandments to permit a funeral director to deny his God-given sex.

On cross-motions for summary judgment, a district court judge ruled in favor of the employer. The EEOC—with Stephens having intervened—appealed. The U.S. Court of Appeals for the Sixth Circuit reversed, granting summary judgment to the EEOC on the unlawful termination claim and remanding the claim on the discriminatory clothing allowance.

“Discrimination on the basis of transgender and transitioning status is necessarily discrimination on the basis of sex, and thus the EEOC should have had the opportunity to prove that the Funeral Home violated Title VII by firing Stephens because she is transgender and transitioning from male to female,” the court wrote.

It is analytically impossible to fire an employee based on that employee’s status as a transgender person without being motivated, at least in part, by the employee’s sex, the panel said, citing the recent Seventh Circuit decision in Hively v. Ivy Tech Community College of Indiana for support.

Would Stephens have been fired if she had been a woman who sought to comply with the women’s dress code at the funeral home? “The answer quite obviously is no,” the court said. “This, in and of itself, confirms that Stephens’s sex impermissibly affected Rost’s decision to fire Stephens.”

Further, “discrimination against transgender persons necessarily implicates Title VII’s proscriptions against sex stereotyping,” the panel wrote. “[A]n employer cannot discriminate on the basis of transgender status without imposing its stereotypical notions of how sexual organs and gender identity ought to align. There is no way to disaggregate discrimination on the basis of transgender status from discrimination on the basis of gender non-conformity, and we see no reason to try.”

Prior Sixth Circuit precedent holding that Title VII does not forbid sexual orientation discrimination was distinguished by the panel as a different question than discrimination against a transgender individual.

As for defenses to the employer’s liability, the court rejected the application of Title VII’s “ministerial exception” to the employer as well as the funeral home’s use of the RFRA.

The funeral home did not qualify for the “ministerial exception” because it is not affiliated with any church, its articles of incorporation do not avow any religious purpose, its employees are not required to hold any particular religious views, and it employs and serves individuals of all religions, the panel explained. Nor was Stephens a ministerial employee. Her title (“funeral director”) conveyed a purely secular function, the record did not reflect she had any religious training, she did not perform important religious functions and she was not an ambassador of any faith.

Turning to the RFRA, the statute prohibits the government from enforcing a religiously neutral law against an individual if that law substantially burdens the individual’s religious exercise and is not the least restrictive way to further a compelling government interest.

But even taking Rost’s assertions regarding his religious beliefs as sincere, the panel found that continuing to employ Stephens would not substantially burden the funeral home’s ability to serve mourners. The employer’s position that permitting Stephens to dress as a female would “create distractions for the deceased’s loved ones and thereby hinder their healing process” was “premised on presumed biases,” the court wrote. “[W]e hold as a matter of law that a religious claimant cannot rely on customers’ presumed biases to establish a substantial burden under RFRA.”

In addition, allowing Stephens to wear attire that reflects her conception of gender that is at odds with Rost’s religious beliefs is not a substantial burden pursuant to the RFRA, the panel said. “[A]s a matter of law, tolerating Stephens’s understanding of her sex and gender identity is not tantamount to supporting it,” the court said. “[B]are compliance with Title VII—without actually assisting or facilitating Stephens’s transition efforts—does not amount to an endorsement of Stephens’s views.”

Finally, the Sixth Circuit concluded that the EEOC has a compelling interest in ensuring that the funeral home does not discriminate against its employees on the basis of their sex and that the agency’s efforts are the least restrictive way to further this interest. “Where the government has developed a comprehensive scheme to effectuate its goal of eradicating discrimination based on sex, including sex stereotypes, it makes sense that the only way to achieve the scheme’s objectives is through its enforcement,” the court said.

“Discrimination against employees, either because of their failure to conform to sex stereotypes or their transgender and transitioning status, is illegal under Title VII,” the panel wrote. “The unrefuted facts show that the Funeral Home fired Stephens because she refused to abide by her employer’s stereotypical conception of her sex, and therefore the EEOC is entitled to summary judgment as to its unlawful termination claim. RFRA provides the Funeral Home with no relief because continuing to employ Stephens would not, as a matter of law, substantially burden Rost’s religious exercise, and even if it did, the EEOC has shown that enforcing Title VII here is the least restrictive means of furthering its compelling interest in combating and eradicating sex discrimination.”

To read the opinion in Equal Employment Opportunity Commission v. R.G. & G.R. Harris Funeral Homes, Inc., click here.

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