Three Recent State Supreme Court Decisions that Every California Employer Needs to Know About
July 30, 2018
In just the past five months, the California Supreme Court has issued three rulings that significantly impact the legal landscape for California employers. These decisions impact payment for “working off the clock”, classification of workers as independent contractors, and calculating overtime when paid bonuses. Below is a summary of these three rulings as well as tips for employers.
Employers must Pay Employees for Every Minute they Perform Work
Just last week, the California Supreme Court ruled in Troester v. Starbucks, No. S234969 (July 26, 2018) that California employers must pay their non-exempt employees for all time spent – even if it’s a few minutes – performing work-related tasks after clocking out.
In the Troester case, Starbucks’ Shift Supervisor Douglas Troester argued that the four to ten minutes a day he spent on tasks after clocking out - such as uploading sales data, logging off the computer, activating the alarm and locking the front door - should be compensated. Starbucks, on the other hand, argued that California should follow the federal de minimis rule, which allows for small amounts of time worked to be uncompensated due to it being administratively difficult to record.
In a unanimous opinion, the California Supreme Court ruled that the text and history of California’s wage orders do not indicate an adoption of the de minimis rule. The Court stated that California law does not permit any version of the de minimis rule to apply in the facts in this specific case, but noted that the Court is not deciding “whether there are circumstances where compensable time is so minute or irregular that it is unreasonable to expect the time to be recorded.”
Employer Tip: Employers should evaluate how much time their non-exempt employees are spending on work-related tasks before clocking in and after clocking out, and determine if the time needs to be compensated in light of this new ruling. For example, if an employee clocks in on a computer-based time keeping system, how much time does it take the employee to turn on and log into the computer? Or how much time does it take a clocked-out employee to go through an employer’s security protocols when leaving work?
New Independent Contractor Test Narrows the Classification
On April 30, 2018, the California Supreme Court, in Dynamex Operations v. Superior Court, No. S222732 (Apr. 30, 2018) issued a ruling that changes the test California employers must use to determine if a worker is an independent contractor or an employee. For decades, California has used a multifactor, balancing test that primarily emphasized whether the business retained the right to control the manner and means by which work is performed.
The new test – called the “ABC test” – significantly narrows the independent contractor classification. Under the “ABC test,” the California Supreme Court stated that a worker hired to perform services is an employee of the hiring business, unless the hiring business can prove all three of the following elements:
A. the worker is free from control and direction of the hirer in connection with performing the work, both under contract and in fact; and
B. the worker performs work outside the usual course of the hiring entity’s business; and
C. the worker customarily engages in an independently established trade, occupation, or business of the same nature as the work performed for the hirer.
The Court’s ruling is applicable in the context of classification under California’s wage orders, which regulates wages, hours, and working conditions in certain industries or occupations. The ruling will undeniably have a wide-reaching impact on employers in this state, including those participating in the “gig economy” and companies that bring on independent contractors to help with limited-scope and/or temporary projects.
Employer Tip: Employers who use independent contractors must assess their classification under the narrower “ABC test”. Workers classified properly as independent contractors under the previous test may no longer be able to satisfy the three-pronged “ABC test”. To mitigate the risk of costly litigation and governmental audits, employers may need to reclassify workers and/or re-evaluate their business models.
Flat Sum Bonuses Must Factor into Overtime Calculations
The question before the California Supreme Court in Alvarado v. Dart Container Corporation, No. S232607 (March 5, 2018) was how do employers calculate overtime in pay periods in which an employee earns a flat sum bonus. The Court adopted a calculation method that is more favorable to employees, and of further concern to employers, ruled that its holding applies retroactively.
The adopted calculation method requires employers to divide the total compensation earned in a pay period by only the non-overtime hours worked by an employee. Here is an example: An employee works 100 hours in a two-week pay period, which includes 80 non-overtime hours and 20 overtime hours. The employee earns a regular hourly rate of $20 and a $200 bonus. The per-hour value of the bonus must be calculated by dividing $200 by the 80 non-overtime hours, which comes out to $2.50/hour. This amount is then added to the employee’s hourly rate, making the regular hourly rate $22.50 ($20.00 + $2.50). The overtime calculation would then be $22.50/hour x 1.5 overtime rate ($33.75/hour) x 20 overtime hours.
Employer Tip: Since this holding applies retroactively, California employers face liability risks for previous practices that may have resulted in unpaid compensation. To avoid potential costly claims, employers should consider evaluating its past pay practices and making retroactive pay adjustments. Looking forward, employers who provide their non-exempt employees a flat fee bonus, should ensure their overtime pay practices are compliant with this new calculation.