Seyfarth Synopsis: Employers adopting an Alternative Workweek Schedule (AWS) must follow the specific rules in the applicable wage order or face liability for unpaid overtime. But employees cannot recover penalties for accurate wage statements, even if the statements do not record unpaid wages that are due. Maldonado v. Epsilon Plastics, Inc.

Legal Background

California Labor Code section 511 provides that an employer may adopt an AWS only if two-thirds of the affected employees approve the AWS in a secret vote. Specific AWS requirements appear in the applicable wage orders.

Wage Order 1, for the manufacturing industry, permits adoption of an AWS only upon satisfying these requirements: (1) the employer proposes an AWS in writing, (2) two-thirds of the affected employees vote to adopt the proposed AWS, in a secret ballot conducted during regular working hours at the work site, (3) the employer has made a written disclosure regarding the effects of the proposed arrangement on wages, hours, and benefits, and has held at least one meeting at least 14 days before the vote, (4) the results of the election have been timely reported to the Division of Labor Statistics and Research, (5) employees have not been required to work the new hours for at least 30 days after election results were announced, and (6) the employer has not coerced any employee’s vote.

Labor Code section 226, meanwhile, requires that employers issue wage statements for each pay period that accurately record such things as the wages earned, the number of hours the employee has worked, and the pay rate assigned to each hour of work.

The Facts

Olvin Maldonado operated a production machine for Epsilon Plastics, Inc., manufacturing plastic bags. Maldonado worked under an AWS by which employees worked 12-hour shifts that paid them at their regular rate for their first 10 hours of work and at an overtime rate for the next two hours.

Maldonado sued Epsilon on behalf of a class of production employees, claiming unpaid daily overtime wages for the time worked after eight hours. The lawsuit involved four periods in which Epsilon’s plant operated on an AWS.

The first period began in April 2007. The AWS then in effect had been in place since Epsilon acquired the plant from Apple Plastics in 2002. The trial court found no evidence that Apple had met the AWS requirements of a written disclosure, a meeting, a vote, a 30-day waiting period, or a report to the state. In January 2008, Epsilon conducted a revote to confirm the employees’ agreement to the AWS. There was a secret ballot, preceded by a written memo, but there was no evidence of a pre-vote meeting. In addition, a supervisor voted even though he was salaried exempt, and thus was not an employee subject to the AWS.

The second period ran for about a month in 2009. As to this period, Epsilon’s HR administrator prepared a memo stating that the plant would be moving to a 12-hour shift and would be “conducting this election” to get “employee input.” The memo continued: “Below please indicate if you agree with the twelve hour shift schedule or if you disagree with it.” The memo explained the terms of the AWS, but failed to specify that without adoption of the AWS, overtime pay on the 12-hour shift would begin after the first eight hours. The HR administrator met with each shift of employees, but not until the same day they voted for the AWS. There was evidence that employees were coerced into voting yes, and the AWS went into effect six days after the vote.

The third period covered two weeks in 2010, but Epsilon did not conduct a vote for this period.

The plant returned to an AWS for a fourth, two-year period between 2011 and 2013. A vote was conducted eight days after this AWS took effect.

The trial court concluded that, as to all four periods, the AWS had not been adopted in accordance with the applicable wage order. The court awarded unpaid overtime, interest, penalties for untimely termination pay and inaccurate wage statement penalties, and attorney’s fees. As to the wage statements, the trial court awarded penalties. The court found that the statements were inaccurate because whenever the plant was on the AWS the wage statements did not properly indicate the ninth and tenth hours were overtime hours. The trial court further concluded the employees had suffered injury from this violation because they were not paid all of the overtime wages they were due.

Epsilon appealed.

The Court of Appeal’s Decision

The Court of Appeal rejected Epsilon’s argument that Maldonado had failed to prove that Epsilon’s predecessor, Apple, had failed to comply with AWS requirements. It was Epsilon—not Maldonado—who had the burden of proof as to whether Apple had complied. Epsilon failed to meet its burden as to the initial period of the AWS, as well as to the later periods.

The Court of Appeal agreed with Epsilon, however, about the wage statements. The wage statements did correctly recorded the hours actually worked and the pay actually received. That was good enough. There was no further requirement that the wage statement show what the employees should have been paid.

The Court of Appeal reasoned that if failure to pay overtime wages at the appropriate rate generates an injury that justifies penalties for an inadequate wage statement, then there would be an apparent unintentional double recovery. The Court of Appeal concluded that while the invalid AWS mandated that the employees receive unpaid overtime wages, interest, and attorney’s fees, that violation did not mandate an award of penalties for wage statements that accurately recorded the hours worked and the pay received.

What Maldonado Means for Employers

Wage order procedures for an AWS must be followed to a “T” to avoid liability for overtime wages. A company purchasing a company already using an AWS should look for evidence that the AWS was properly adopted; a successor company cannot assume that its predecessor correctly followed all the prescribed procedures.

The silver lining of this decision is the commonsense approach the Court of Appeal took as to the wage statements. Wage statements need only record what employees actually got paid, not what they should have been paid.

Among the implications of this ruling would be that employers should not be liable for wage statements that fail to record premium pay employees should have received during a pay period in which the employer failed to provide a meal or rest break. First, as Maldonado clearly implies, recording pay employees should have received is not the function of a wage statement. Second, of course (and this is an issue Maldonado does not reach), money paid to compensate for breaks is, properly understood, not wages earned. The harshness of the Maldonado ruling on AWS issues as to Labor Code section 511 is thus counterbalanced by a sensible reading of Section 226.