California Employment Law Update

California Supreme Court Holds That Meal And Rest Break Premiums Must Include All Forms Of Remuneration (Not Just Base Hourly Rate)

On July 15, 2021, the California Supreme Court issued its decision in Ferra v. Loews Hollywood Hotel, LLC, in which it held that meal and rest break premiums required under California Labor Code section 226.7 (“Section 226.7”) must be paid at non-exempt employees’ regular rate of pay—not merely their base hourly rate.  The decision, which applies retroactively, requires that employers promptly adjust their pay practices.

Background

Like the federal Fair Labor Standards Act (“FLSA”), Labor Code section 510 (“Section 510”) requires that employers pay non-exempt employees overtime at their “regular rate[s] of pay.”  Under a different section of the Labor Code and the Industrial Welfare Commission’s (“IWC”) Wage Orders, employers also must provide non-exempt employees with unpaid meal and paid rest breaks at set intervals, depending on how many hours the employees work.  Under Section 226.7, if an employer fails to provide an employee with a compliant meal or rest break, the employer must “pay the employee one additional hour of pay at the employee’s regular rate of compensation.”  Cal. Lab. Code § 226.7(c) (emphasis added).

Since the language in Section 226.7 is different from that in Section 510 (“regular rate of compensation” versus “regular rate of pay”), employers had long understood that the meal and rest break premiums were to be paid at non-exempt employees’ base hourly rates (i.e., the premiums did not have to include other forms of compensation above and beyond the base hourly rate).  That is, until Ferra.

Ferra

Ferra was a wage and hour class action brought by a former hotel bartender, Jessica Ferra (“Ferra”), against Loews Hollywood Hotel, LLC (“Loews”).  In addition to her hourly rate, Loews had paid Ferra certain nondiscretionary bonuses.  In her lawsuit, Ferra claimed that Loews violated California law by failing to include nondiscretionary bonuses when calculating meal and rest break premiums.

Both the trial court and the Court of Appeal held in favor of Loews, deciding that the “regular rate of pay,” as used in Section 510, was not synonymous with “regular rate of compensation,” as used in Section 226.7.  The California Supreme Court saw things differently, however.

In an opinion authored by Associate Justice Goodwin Liu, the Court held that “regular rate of compensation,” as used in Section 226.7, means the same thing as an employee’s “regular rate of pay” for purposes of overtime.  Recognizing that the Labor Code provided no definition of “regular rate of compensation” under Section 226.7, the Court began by examining the legislative history of both Section 510 and Section 226.7.  As to the former, the Court noted that both California’s Division of Labor Standards Enforcement (“DLSE”) and courts had long understood Section 510’s definition of “regular rate” to have the same meaning as the phrase does under the FLSA, under which nondiscretionary amounts (and most other types of compensation) must be included in the overtime calculation.

As to Section 226.7’s history, Loews had argued that because “regular rate of pay” was an “established term of art” by the time Section 226.7 was enacted, the fact that the Legislature used a different phrase in Section 226.7 meant that it did not intend “regular rate of pay” and “regular rate of compensation” to have the same meaning.  However, the majority rejected that argument, deciding that the modifiers “of pay” and “of compensation” were irrelevant.  In support of its interpretation, the Court noted that “the Legislature used the terms ‘pay’ and ‘compensation’ interchangeably in the very text of [S]ections 226.7(c) and 510(a).”  The Court also pointed out that the terms had been used interchangeably by a number of federal appellate courts – including the U.S. Supreme Court – in interpreting the FLSA.

Finally, and most troublingly, the Court rejected Loews’ argument that its opinion should apply only prospectively.  Therefore, the Ferra decision applies retroactively.

Practical Implications

Ferra will have significant consequences for any employer with non-exempt employees in California.  Although Ferra only concerned nondiscretionary bonuses, its holding almost certainly applies more broadly to other types of remuneration that must be included in an employee’s regular rate for purposes of overtime (e.g., commissions).  Employers immediately must ensure that they pay meal and rest break premiums based on employees’ regular rates of pay under Section 510—not merely their base hourly rates.  Further, employers with questions about how to address Ferra’s retroactive application should consult legal counsel as soon as possible.

President Biden Signs Executive Order Targeting Noncompetition Agreements

On July 9, 2021, President Biden signed an Executive Order on Promoting Competition in the American Economy (the “Order”), which, among other things, “encourage[s]” the “Chair of the [Federal Trade Commission (the “FTC”)] . . . to consider working with the rest of the Commission to exercise the FTC’s statutory rulemaking authority . . . to curtail the unfair use of non-compete clauses and other clauses or agreements that may unfairly limit worker mobility.”  To be clear, the Order does not impact the current state of the law or enforceability of noncompetition agreements in any context, including those between an employer and its employees, partners, or in the context of the sale of a business.  Rather, it “encourage[s]” the FTC to “consider” using its authority to “curtail the unfair use of non-compete clauses.”  While there was much fanfare that the Order could amount to a ban on noncompetition agreements, the text of the Order and President Biden’s remarks make it clear that is simply not the case.

According to White House Press Secretary Jen Psaki, “roughly half of private sector businesses require at least some employees to enter non-compete agreements, affecting over 30 million people.”  Prior to publication of the Order, Ms. Psaki noted that it seeks to address noncompetition agreements that “affec[t] construction workers, hotel workers, many blue-collar jobs, [and] not just high-level executives.”  This is consistent with President Biden’s comments upon executing the Order that it is not just highly paid workers or scientists who know an employer’s “secret formula” who are subjected to noncompetition agreements, but rather ordinary, low wage workers, such as those working in the fast-food industry, who should have protection from such agreements.

Read the full post on Proskauer’s Law and the Workplace blog.

Tax Hikes Proposed to Bail Out California Unemployment Fund

Just as California’s employers and small businesses begin to recover financially from the COVID-19 pandemic, the state legislature is about to spring another tax increase on them. This time the money is needed to bail out the severely underfunded unemployment insurance (UI) fund (a program recently featured in the news for paying as much as $2 billion in fraudulent unemployment claims, which included sending checks to death row prisoners).

This comes as no surprise to many observers as the UI fund barely met its obligations in prior years. And as claims surged over the past year, California borrowed $21 billion from the federal government—nearly double the debt incurred by the UI fund during the Great Recession. Now, absent legislative action, employers will be on the hook for these loans through higher payroll taxes of $21 per employee per year starting in 2022. The tax will increase yearly by that same amount to a maximum of $420 per employee per year.

Remarkably, despite the UI debt, California has a $38 billion general fund surplus and $26 billion more is on the way from the federal government. But as tax hikes grow increasingly popular in Sacramento, legislators seem unlikely to offer relief by redirecting any of these funds toward the UI fund. In fact, even Governor Newsom’s proposal of providing $1.1 billion to the UI fund appears to have been eliminated in the latest round of budget negotiations.

This decision ignores a fact that employers and small businesses know well: every dollar paid to the government is a dollar less they can use towards hiring new employees or giving raises to their employees who endured this crisis with them. Yet, California employers are accustomed to the legislature ignoring the consequences of being one of the highest tax states in the nation.

Board of Directors Quota Law May Be Unconstitutional

Meland v. Weber, ___ F.3d ___, 2021 WL 2521615 (9th Cir. 2021)

In 2018, the California Legislature enacted Senate Bill 826, which requires all corporations headquartered in California to have a minimum number of females on their boards of directors; corporations that fail to comply with SB 826 are subject to monetary penalties.  One shareholder of OSI Systems, Inc., Creighton Meland, brought an action challenging the constitutionality of SB 826 on the ground that it requires shareholders to discriminate on the basis of sex when exercising their voting rights in violation of the Fourteenth Amendment.  The district court granted a motion to dismiss Meland’s complaint for lack of Article III standing, reasoning that Meland had not suffered an injury in fact.  In this opinion, the Ninth Circuit reversed the district court, holding that to the extent Meland’s allegations that SB 826 “requires or encourages” him to discriminate on the basis of sex, he has suffered a concrete personal injury sufficient to confer Article III standing.  The Court further held that Meland’s “injury is ongoing and neither speculative or hypothetical, and the district court can grant meaningful relief.”

California Safety Board Narrows Emergency Temporary Standards (Effective Immediately)

As we previously reported (here), Cal/OSHA’s Occupational Safety and Health Standards Board (“OSHSB”) held a series of special meetings to revise its controversial Emergency Temporary Standards (“ETS”) related to the ongoing COVID-19 pandemic.  And, on June 17, 2021, OSHSB approved updated ETS language that more closely aligns California’s workplace safety requirements with recommendations from the CDC and California Department of Public Health.

Most significantly, the revised ETS permit fully vaccinated employees to unmask indoors. Unvaccinated employees still must mask-up while indoors (except in limited circumstances), but neither vaccinated nor unvaccinated employees are required to wear face coverings when outside, except during an outbreak.  The revised ETS also dropped previous social distancing requirements for all employees, except in limited circumstances (e.g., where unvaccinated employees are eating and drinking) and remove restrictions on sharing personal items and equipment.  Furthermore, fully vaccinated employees, and others who had COVID-19 in the past 90 days, will no longer be required to quarantine after coming into contact with someone with COVID-19, so long as they are asymptomatic.

According to OSHSB’s FAQs, employers must document employees’ vaccination status in one of three ways: (1) by obtaining a copy of employees’ proof of vaccination; (2) creating a record of employees who presented proof of vaccination; or (3) creating a record of employee self-attestations as to vaccination status (i.e., the “honor system”).

Although generally more reasonable, the new ETS still impose some rather unusual and burdensome obligations on employers, including a requirement that employers procure and offer respirator masks (e.g., N-95s) to unvaccinated employees.  The new ETS also require employers to make testing available to symptomatic unvaccinated employees, at no cost to the employees.  Further, the updated ETS preserve the requirement that employers develop written COVID-19 Prevention Programs.

Per an Executive Order signed by Gov. Newsom on June 17, 2021, the new ETS take effect immediately.  Therefore, employers should move quickly to implement the new requirements.

California Revokes Controversial Masking Rules

As we previously reported (here), on June 3, 2021, California’s Occupational Safety and Health Standards Board (“OSHSB”) approved some controversial revisions to its Emergency Temporary Standards (“ETS”) related to COVID-19.  Among other highly-contested provisions, the updated ETS would have required even fully-vaccinated individuals to don masks indoors unless everyone in a room was fully-vaccinated.  However, before the much-maligned revised ETS could take effect, the OSHSB did an immediate about-face.

On June 9, 2021, the OSHSB convened a special meeting to consider how the new ETS aligned with guidance from the Centers for Disease Control and Prevention and the California Department of Public Health.  At the meeting, which lasted several hours, dozens of representatives from the business community and public at large assailed the updated ETS for being out-of-touch with federal and state public health guidance.  Ultimately, the OSHSB was persuaded and voted unanimously to withdraw the revised ETS before they even went into effect.

Instead, the OSHSB will consider further revisions to the ETS, which some members of the OSHSB have indicated will more closely align with new guidelines from the California Department of Public Health (effective June 15th), which no longer require fully-vaccinated individuals to wear masks in most settings.

The OSHSB could take up this issue again as early as its next meeting, on June 17, 2021.  Stay tuned for more updates.

California Workers Can’t Ditch Masks Just Yet

In a closely-watched vote, yesterday (June 3, 2021), California’s Occupational Safety & Health Standards Board  approved controversial amendments to the Emergency Temporary Standards (“ETS”) related to COVID-19.  If approved by the Office of Administrative Law within the 10 day review period, the new ETS (available here) will require (among many other things) most California workers (whether or not they are vaccinated) to continue to wear face masks “when indoors, when outdoors and less than six feet away from another person, and where required by orders from the … [California Department of Public Health] or local health department[s].”  Employees will not be required to wear a mask when they are alone in a room or while eating and drinking, if socially distanced and outside or inside with maximized outside air-supply.  Fully-vaccinated employees without COVID-19 symptoms will be able to forgo masks when they are outdoors or when everyone in a room is fully-vaccinated and nobody has any COVID-19 symptoms.  Likewise, masks will not be required where employees must undertake “[s]pecific tasks which cannot feasibly be performed with a face covering,” although this exception is “limited to the time period in which such tasks are actually being performed.”

A subcommittee has been established to consider additional revisions to the new ETS language in the coming weeks.  However, as of June 3rd, less than ½ of the total California population is “fully-vaccinated.”  Therefore, for the time being, this means that even if California’s Department of Public Health revises its face masking requirements to more closely-align with those promulgated by the CDC in May, many California employees still will need to wear masks at work—at least when they are in the company of other employees.

The updated ETS language faced spirited opposition from employers.  In addition to the masking requirements, the California Chamber of Commerce identified a number of other seriously problematic provisions, including language requiring employers to stockpile and provide N-95 masks to unvaccinated employees by July 31, 2021.

We’ll bring you more information when we know it.

Alleged Employer Violation of a Local Ordinance Cannot Support a Wrongful Discharge Claim

The California Court of Appeal has determined that a wrongful discharge claim cannot be based upon an alleged violation of a municipal ordinance.  Bruni v. The Edward Thomas Hospitality Corporation.

The California Supreme Court has previously ruled that wrongful termination claims must be based upon a violation of a “fundamental public policy.”  In the years since that decision, plaintiffs’ lawyers have asserted a wide variety of wrongful discharge, constructive discharge, and failure to hire claims based on a broad array of federal, state and local statutes, constitutional provisions, regulations and ordinances.  However, it had been an open question as to whether such a claim could be based upon the employer’s alleged violation of a local ordinance as distinguished from a state statute.  Bruni resolved that question in favor of the employer.

In Bruni, a restaurant server sued his former employer (a hotel), alleging: (1) violation of a Santa Monica municipal recall ordinance; and (2) a derivative wrongful failure to rehire claim based on an alleged public policy expressed in the local ordinance.  The Court of Appeal affirmed the trial court’s order sustaining the hotel’s demurrer (motion to dismiss) on both causes of action.  As to the server’s claim under the local ordinance, the Court held that the employee’s earlier period of employment that ended with his voluntary resignation did not count toward the six-month minimum period of employment required to state a viable cause of action under the Santa Monica ordinance.

More significantly, the Court affirmed the trial court’s dismissal of the server’s wrongful failure to rehire claim because “a municipal ordinance cannot serve as the predicate for a [wrongful termination] tort claim.”  The Court held that these claims “must be predicated on a fundamental public policy that is expressed in a constitutional or statutory provision … as opposed to a public policy that finds expression in a municipal ordinance.”

While Bruni concerned a local recall ordinance enacted in response to the economic downturn following 9/11, its potential impact is far broader.  Specifically, in the wake of the COVID-19 pandemic, local jurisdictions up and down the state have enacted dozens – if not hundreds – of new ordinances.  Bruni puts the kibosh on a potential new wave of frivolous wrongful discharge suits based on these local legislative enactments.

Big Brother Comes to Santa Clara County with Latest COVID-19 Order

On May 18, 2021, Santa Clara County issued a new Order of the Health Officer (the “Order”) that took effect on May 19th.  Of particular note, the Order imposes two new obligations:  First, it mandates that employers require all personnel to immediately alert their employer if they test positive for COVID-19 and were present in the workplace either (1) within the 48 hours prior to onset of symptoms or within 10 days after onset of symptoms if they were symptomatic; or (2) within 48 hours prior to the date on which they were tested or within 10 days after the date on which they were tested if they were asymptomatic.  Businesses are required to report any confirmed COVID-19 cases reported to them to the County within 24 hours.

Second, the Order requires that employers ascertain the vaccination status of all personnel within 14 days of the effective date of the Order.  Until an employee’s vaccination status has been ascertained, the Order requires that such employees be treated as though they are unvaccinated for purposes of any reopening protocols.  Further, any employees who decline to provide an employer with information regarding their vaccination status also must be treated as though they are unvaccinated.  Employers are required to obtain updated vaccination status information for all personnel who were not fully vaccinated every 14 days.

Although California’s current state masking guidance continues to require employees to wear masks indoors in virtually all settings—even when vaccinated—the state has indicated that will change by June 15, 2021.  When that happens, it is likely that rules will differ for vaccinated and unvaccinated employees.

California Mulls More Job Killer Bills, Major Tax Hikes

Last week, New York announced new tax increases that will subject certain of its residents to higher personal income tax rates than even Californians pay.  Before the pages on that bill had cooled, the California legislature was well on its way to showing it would not relinquish its top-of-the-heap status without a fight by proposing a new “wealth tax” on California residents.

In response, the California Chamber of Commerce added the following four bills to its annual list of Job Killer bills.

Here are the fresh additions:

ACA-8 (Lee; D-San Jose) New Wealth Tax – Would amend the California Constitution to allow a tax on “extreme wealth” granting the Legislature authority to tax all forms of personal property or wealth.  The measure would require the Legislature to create a task force to determine “adequate funding and staffing for the administration of the wealth tax.”  Though the measure does not explicitly define which individuals would be subject to this unprecedented new tax, it does predict that adequate funding will result in an audit rate of 100% for billionaires and 25% for hundred-millionaires.  The list of under-funded “needs” the measure is ostensibly intended to address includes long-term issues like “education, healthcare, infrastructure” and new needs like “pandemic recovery and climate change resilience.”

AB-310 (Lee; D-San Jose) New Wealth Tax – Would impose an annual tax of 1% of a resident’s worldwide net worth in excess of $50 million or $25 million for a married tax payer filing separately.  The bill would impose an additional 0.5% tax for payers with a net worth in excess of $1 billion, or $500 million if married and filling separately.  The term “worldwide net worth” would not apply to real property or tangible personal property outside the state held directly by the taxpayer, but would apply to such property held through a business or other legal entity.

AB-1253 (Santiago; D-Los Angeles) Personal Income Tax Increase – Would impose a tax of 1% on that portion of an individual’s taxable income over “the adjusted” $1 million, 3% on the same portion over $2 million, and 3.5% on that portion over $5 million.    The “adjusted” amount represents the taxable amount as recomputed by the Franchise Tax Board, and generally indicates the tax will effectively be levied on income that is slightly higher than the stated amount – i.e., “adjusted $1 million” equals $1,181,484.

AB-1192 (Kalra; D-San Jose) – Would establish a program requiring employers with more than 1,000 employees to submit various wage and hour statistics, as well as certain workplace safety and benefits information to the Labor and Workforce Development Agency, which the Agency could later make public.

Mentioned nowhere in this flurry of new tax increases is California’s $26 billion surplus and an additional infusion of $26 billion in unanticipated funds from the federal government—suggesting these measures are more about wealth redistribution than a legitimate desire to raise revenue.

We will continue to track the progress of these bills as they move through the legislature.

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