California Appellate Court Clarifies An “Exempt Employee”

Who is an “exempt employee” in California? An appellate court in the state explained that the statutory language is clear and unambiguous, unpersuaded by an employee’s argument that the term should be limited to workers exempt under administrative, executive or professional exemptions.

A former employee of Charter Communications, Bradley Hirdman accused the company of violating section 246 of the Labor Code in a Private Attorneys General Act (PAGA) case. 

Section 246 sets forth three methods by which employers may calculate sick leave, with two options for “nonexempt employees.” For the third option, “exempt employees” paid sick time “shall be calculated in the same manner as the employer calculates wages for other forms of paid leave time,” per section 246 subdivision (l)(3).

The statute does not define “exempt employees” or “nonexempt employees.”

Charter employed Hirdman as a sales representative and classified him as exempt from overtime requirements under the outside salesperson exemption.

During the relevant period, Charter calculated and paid sick leave to Hirdman and other outside salespersons per the method in section 246, at the same rate as other forms of paid time off, which was their hourly base rate of pay, excluding commissions.

The parties filed cross motions for summary adjudication. Hirdman contended that employers cannot calculate paid sick leave using the method provided in section 246 subdivision (l)(3) because the meaning of “exempt employees” includes only those employees who are exempt under the administrative, executive or professional exemptions.

In support, Hirdman relied upon an analysis of section 246 from the Senate Committee on Labor and Industrial Relations and an October 2015 Division of Labor Standards and Enforcement (DLSE) opinion letter based on that report.

The trial court sided with Charter, which argued that section 246, subdivision (l)(3) applies to all exempt employees, not just those employees classified as exempt under the administrative, executive or professional exemptions.

Hirdman appealed.

The appellate court began—and ended—with the statute itself.

“The Act does not define the terms ‘exempt employees’ and ‘nonexempt employees,’” the court wrote. “California courts, however, consistently use the phrase ‘exempt employees’ in the private employment context to mean those not entitled to overtime wages under California wage and hour law. The term ‘exempt employees’ can therefore be considered a term of art in this context.”

When the legislature uses a term of art, we “must assume that the Legislature was aware of the ramifications of its choice of language,” the court added, and “[w]e also presume that if the Legislature intended to limit the definition of ‘exempt employees’ in section 246, subdivision (l)(3) to only those persons exempt from overtime as administrative, executive, and professional employees, it would have said so.”

Notably, the legislature did carve out precisely such a limitation in a different subdivision of the same section—section 246, subdivision (b)(2).

“The Legislature thus knew how to carve out a subset of the commonly understood legal term ‘exempt employee’ and chose not to do so in subdivision (l)(3),” the court said.

While Hirdman pushed the court to read subdivisions (b) and (l) in harmony, the court instead found that the legislature’s use of different phrases within the same section demonstrated its intent to use the phrases to mean different things.

The court also declined to rely on the Senate Committee report highlighted by Hirdman, which contained “only a single ambiguous parenthetical” to the provision. As for the DLSE’s reliance on this single parenthetical from a single legislative committee report, the opinion letter specifically stated that it was based exclusively on the facts and circumstances described and any other factual or historical background might compel a different conclusion.

“In sum, we conclude that the trial court correctly determined that section 246, subdivision (l)(3) applies to outside salespersons like Hirdman and thus did not err in granting summary adjudication in favor of Charter,” the court concluded.

To read the opinion in Hirdman v. Charter Communications, LLC, click .

Why it matters: The California appellate panel was not persuaded by the employee’s argument that section 246, subdivision (l)(3)’s use of the term “exempt employees” for purposes of calculating paid sick leave should be limited to those under the administrative, executive or professional exemptions. Instead, the court agreed with the employer that the statutory language was unambiguous, and that section 246, subdivision (l)(3) applies to outside salespersons like the plaintiff.