May 12, 2017

Seventh-Day Case Provides No Rest for California Employers as State's March to Unique Wage-Hour Rules Continues


On May 8, 2017, the California Supreme Court issued its opinion in Mendoza v. Nordstrom, Inc. The case interprets the state Labor Code's "day of rest" provision, which guarantees employees one day off in seven. In its technical aspects, the opinion largely favors employers. But it also makes clear that employers who violate the statute and "cause" their employees to work without a day of rest will face civil penalties—and even criminal prosecution.

Mendoza offers a stark reminder that, when it comes to wage-and-hour law, California doesn't just follow a slightly enhanced version of federal law. Instead, California marches to the beat of its own drum, creating significant risks of non-compliance for companies who follow one-size-fits-all nationwide policies when hiring workers in the Golden State. To assist our clients in assessing these risks, we are including a summary of some of the most important differences between federal and California law in this area.

Mendoza v. Nordstrom and Its Legal Holdings

Mendoza is a class-action lawsuit pending in the US District Court for the Central District of California. The plaintiffs assert violations of California Labor Code sections 551 and 552, which respectively provide that: every employee in California is "entitled" to "one day's rest [from labor] in seven"; and, no employer may "cause" its employees "to work more than six days in seven." For good measure, Labor Code section 553 provides that a violation of the foregoing sections is a misdemeanor.

The Mendoza plaintiffs, who are hourly retail workers, allege that supervisors and co-workers asked them to pick up previously unscheduled shifts, which they then worked, causing them to work more than seven days in a row. Important to note, the plaintiffs did not complain that they were denied overtime pay for their seventh-day work; instead, they alleged that the very fact that they worked seven days without a day off violated the Labor Code. Because sections 551 and 552 do not provide for financial penalties, the plaintiffs sought penalties under the catch-all provisions of the state Private Attorney Generals Act, which mandates a penalty of up to $200 per employee for each pay period in which a Labor Code violation occurs.

Given a dearth of case law on the subject, several unresolved legal issues surrounding the interpretation of sections 551 and 552 emerged. After an order awarding summary judgment to the employer, the plaintiffs appealed to US Court of Appeals for the Ninth Circuit. Rather than interpret novel questions of California law, the Ninth Circuit certified the key legal questions to the California Supreme Court. The newly published Mendoza opinion provides the answers.

Defining Six Days in Seven: The Workweek Test

The first question addressed by the Court was whether the prohibition against working "more than six days in seven" is to be interpreted on a rolling or "workweek" basis. In other words, do any seven consecutive days of work, even if they cross two workweeks, violate the seventh-day protection, or is it sufficient for the employer to give one day off in each workweek, even if it results in more than six consecutive days?

The Court adopted a "workweek" test. Although the language of the statute could be read literally to regulate any rolling period of seven days' work, the Court reasoned that such an interpretation conflicted with the purpose of the statute which was to protect one day a week for rest. The Court also noted the difficulty of harmonizing a rolling seven-day requirement with other provisions of the Labor Code, such as those that award premium pay for work on the sixth or seventh day of a given workweek. And, the Court noted, Wage Orders issued by the state's Industrial Welfare Commission had always read the provision as applying on a workweek basis. As a result of this holding, California employers do not have to provide the same day of rest each week (e.g., every Sunday) to employees. Indeed, an employer with a typical Sunday-Saturday workweek could even satisfy the day of rest by scheduling a back-to-back weekend every other week.

Permit, Require, or Something Else: Defining "Cause"

Another issue decided in Mendoza is the degree to which an employer must require or otherwise induce an employee to work a seventh day before it violates the rule that it may not "cause" an employee to miss his or her day off. The Court rejected the plaintiffs' interpretation that simply permitting an employee to work all seven days in a week violated the statute. But it also rejected an interpretation advanced by the defendant and industry groups, which was that only an express requirement to work the seventh day would violate the statute.

Instead, the Court announced a middle-ground rule: "an employer's obligation is to apprise employees of their entitlement to a day of rest and thereafter to maintain absolute neutrality as to the exercise of that right. An employer may not encourage its employees to forgo rest or conceal the entitlement to rest, but is not liable simply because an employee chooses to work a seventh day."

Expanding on that interpretation later in its decision, the Court stated that an employer cannot expressly or even "implicitly" attempt to influence employees to work a seventh day. This holding apparently extends not simply to reprisals or threats, but even to positive inducements. (The only exception the Court acknowledged was the legal requirement to pay overtime, which, the Court held, is not an impermissible inducement since it is obligatory.)

The Numbers Game: The 30/6 Rule

The remaining issue that Mendoza resolves is the scope of an exception to the seventh-day rule provided in Labor Code section 556. That statute provides that an employer does not violate sections 551 and 552 when "the total hours of employment do not exceed 30 hours in any week or six hours in any one day thereof."

The double-negative wording of section 556 caused a fair amount of head-scratching in the federal proceedings. The California Supreme resolved the dispute with an interpretation favorable to the plaintiffs. Specifically, the Court held that the exemption afforded by section 556 applies only if both of its conditions are satisfied: (1) the employee's total hours worked in the workweek do not exceed 30; and (2) the employee's hours worked on each and every day of that workweek do not exceed six (6). Thus, an employee who works four hours each and every day of the week is not entitled to a day of rest, because the employee has worked only 28 hours in the week and only four (4) hours on each day. But if an employee works every day in a week but one of those days included a shift of 6.5 hours, the section 556 exemption does not apply whether or not the employee has also worked 30 hours in the week.

Complying with the "Day of Rest" Rules After Mendoza

The most immediate measure required by Mendoza is dictated by the opinion itself: Employers must notify employees of their statutory entitlement to a day of rest. A well-drafted and appropriately acknowledged provision in an employee handbook could satisfy this requirement. Employers may wish to communicate this information more immediately through a memorandum.

In industries where seven-day-a-week operations are common (such as manufacturing, retail, or health care), managers and scheduling personnel should receive training on the subject. Some employers already have employees working a seventh day fill out an acknowledgment that they are voluntarily working the full workweek. Such acknowledgments may help document compliance with the law, although it should be remembered that employees cannot generally waive the protections of the Labor Code.

Taking the broader view, employers should also assure that they are complying with Mendoza's command not to unduly influence an employee's decision to work shifts that violate the seventh-day rule. This may include deciding whether and under what circumstances employees should be pre-scheduled for a seventh day, and reviewing the use of incentive programs that reward employees for working extra shifts. And, of course, there would be few circumstances where it would be appropriate to terminate an employee for refusing to work a seventh day.

At the same time, employers can continue to avail themselves of exemptions from the seventh-day rule, although they should consult with counsel before doing so. In addition to the 30/6 rule in section 556, Labor Code section 554(a) permits employers to "accumulate" days of rest on a monthly basis "when the nature of the employment reasonably requires the employee to work seven (7) or more consecutive days." The same code section also exempts railroad operations, workers in certain agricultural occupations (as specified in Wage Order 14), and extreme emergency situations. Collective bargaining agreements may waive sections 551 and 552, but only if they do so "expressly." Individual employers may also be eligible for exemptions directly from the California Labor Commissioner, under Labor Code section 554(b), if granting the exemption will avoid "hardship."

Finally, Mendoza arose in a case filed by non-exempt (hourly) workers, and nothing in Mendoza suggests that its holding extends to exempt employees (such as white-collar administrative, professional, or executive employees). To the contrary, the Industrial Welfare Commission's Wage Orders have always made clear that the seventh-day rest requirement applies only to hourly workers. However, the interplay of exemptions provided in the state's Wage Orders with the provisions of the Labor Code is a complex subject that gives rise to periodic legal challenges. While employers should be able to continue relying on the Wage Order exemption, they should maintain awareness of emerging developments in this field.

The Bigger Picture: California Law and Federal Law

As emphasized at the beginning of this Advisory, the seventh-day rule is just one example of California's unique approach. Employers should also consider a host of other unique features of California wage-and-hour law (particularly for non-exempt employees) when reviewing their compliance and assessing their risks:

Daily and special overtime. California overtime rules apply on a daily basis (typically eight (8) hours in a day, more in some situations). Employees wishing to devise "alternative work schedules" (for example, four (4) 10-hour shifts a week, must comply with cumbersome election procedures. California law also imposes special overtime liability on work performed on the sixth and seventh days of the workweek.

Meal and rest periods. Employees are entitled to unpaid meal breaks and/or paid rest periods depending on the length of their work day. New case law requires that employees in most industries must be relieved of all duties (and even the obligation to respond to calls) during their rest breaks.

Business expense reimbursement. Employees are entitled to reimbursement of all reasonable and necessary business expenses.

"Nonproductive" time for piece-rate and potentially other workers receiving variable compensation. California law requires that piece-rate workers be paid a separate, time-based rate of pay for time that does not directly contribute to their piece rate (such as time waiting for work and time spent in rest breaks). A related body of case law is developing that potentially extends these rules to commissioned employees and other employees receiving variable compensation.

Calculation of overtime. The California Supreme Court has accepted review in Alvarado v. Dart Container Corp. of California, previously reported at 243 Cal. App. 4th 1200 (2016), which addresses arguments that state law must pay greater overtime than federal law to hourly workers who also receive bonuses.

"De minimis" wage violations. The California Supreme Court has accepted review in Troester v. Starbucks Corp., a pending Ninth Circuit appeal with certified questions about the availability of a "de minimis" defense to state-law wage violations, which is available under federal law.

Private recovery of penalties. The California Private Attorney Generals Act (PAGA) authorizes recovery of penalties for Labor Code violations even (in fact, especially) when the provision at issue does not specify a penalty. For instance, the claims in Mendoza would not have been possible without PAGA. (Before PAGA, the State Labor Commissioner could have cited the employer for violating the law, but there would be no potential civil recovery by affected employees.) Making matters more difficult for employers, PAGA relief can be pursued on a group basis with easier procedural requirements than a class action, and representative PAGA claims have largely been shielded from arbitration.

Differing definition of "commissions" and required written plan. Like federal law, California law provides certain exemptions for commissioned workers. However, California defines what a "commission" is much more narrowly than does federal law, and also requires employers to provide written commission plans to (and obtain a signed receipt from) all employees whose compensation involves commissions.

Broader jurisdiction to resolve wage disputes. The California Labor Code converts virtually any contractual compensation dispute (such as a dispute over unpaid bonuses or commissions) into a statutory Labor Code claim. By contrast, federal laws and the laws of most other states only allow recovery of unpaid minimum wage and/or statutory overtime.

Penalties for independent-contractor misclassification. California law directly penalizes the misclassification of employees as independent contractors. Federal and most other state laws only penalize the practice if it results in a violation of a particular labor statute (e.g., failure to pay minimum wage).

White-collar exemptions. California, like federal law, recognizes exemptions for certain types of "white collar" work such as executive, administrative, and professional occupations, as well as a computer-programmer exemption. In most situations, these exemptions are much more restrictively applied under California than federal law. For example, the salary required to be exempt is higher under California law and exempt duties must occupy more than 50% of the employee's time. In addition, California continues to follow defunct federal regulations (last published in 2004) to guide its analysis of worker classification.

Pay-stub rules. California imposes numerous, highly technical requirements on the formatting of employee pay stubs. In addition, courts have endorsed the theory that minor or unintentional violations of state wage payment rules can lead an employee's paystub to be inaccurate. For example, if an employee is misclassified as overtime-exempt, a court may determine that each and every paycheck the employee received was inaccurate because it did not include the employee's overtime hours. This can lead to a "stacking" phenomenon where an employer is exposed to much greater penalties than the employee's actual economic loss.

Vacation pay. California considers accrued vacation or paid time off (PTO) a type of earned wages that cannot be forfeited under a "use-it-or-lose-it" policy. Employees must be allowed to carry over their accrued but unused vacation from year to year and must be paid for it at their final rate of pay when their employment ends.

Wage deductions. California severely limits the ability of employers to deduct from an employee's wages debts owed by or damages caused by the employee. Employers cannot deduct from an employee's wages amounts for loss or damage caused by the employee's simple negligence. Nor can employers deduct from an employee's final check amounts to pay off an employee's debt unless the employee specifically agrees in writing to the deduction at the time of termination.

Triple jurisdiction. In addition to statutory provisions in the Labor Code, California employers must also comply with Wage Orders issued by the Industrial Welfare Commission, as well as regulations and other guidance from the State Labor Commissioner. Conflicts among these sources of authority can leave employers in limbo about the best course of action.

Unfortunately, these are only examples. The bottom line is that nationwide employers doing business in California cannot assume that nationwide compliance is adequate for California. Instead, almost as if they were setting up shop in a foreign country, they must assure compliance with a completely unique set of rules.

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