This month’s two key California employment law cases are both significant decisions involving wage and hour laws.

Alvarado v. DART Container Corp. of Cal., 4 Cal. 5th 542 (2018)

Summary: California formula for incorporating hourly value of flat sum bonus, when calculating employee’s regular rate of pay during pay period in which both hourly compensation and flat sum bonus are earned, divides flat sum bonus by total number of non-overtime hours worked. Contrary to federal regulations, formula should not also include employee’s overtime hours worked.

Facts: Defendant DART Container Corp., a manufacturer of foodservice products, provided an attendance bonus to its California non-exempt employees who completed a full shift on either Saturdays or Sundays. The bonus was a flat sum of $15 per weekend shift, regardless of shift length. To calculate the hourly value of the attendance bonus for purposes of determining an employee’s regular rate of pay, defendant divided the attendance bonus by the total number of hours worked by the employee during the pay period. This formula complies with the method established by the United States Department of Labor under the federal Fair Labor Standards Act, 29 C.F.R. section 778.110. Plaintiff Alvarado, a former employee, claimed that DART’s formula was improper because the flat sum attendance bonus applied regardless of the number of hours worked during a weekend shift. By dividing the attendance bonus by the total number of hours worked, DART improperly depressed the hourly value of the bonus for employees who worked weekend overtime shifts. Plaintiff claimed that the attendance bonus should be divided by the total non-overtime hours actually worked during the pay period. Plaintiff argued that his formula was advocated, although not adopted, by the California Division of Labor Standards Enforcement (“DLSE”). DART acknowledged that the DLSE supported plaintiff’s position but argued that the agency had not adopted that policy pursuant to the procedure mandated by the California Administrative Procedure Act. DART thus claimed that the policy was a void underground regulation. The trial court agreed with DART that (1) the DLSE’s method was a void underground regulation, which could not be followed, and (2) in the absence of a valid California regulation, DART’s formula, which complied with federal guidelines, was lawful. Plaintiff appealed the trial court’s order granting summary judgment, and the California Court of Appeal affirmed, reasoning that DART could not be forced to comply with an unenacted and unofficial DLSE policy.

Court’s Decision: The California Supreme Court reversed, holding that DART’s method violated California’s overtime laws. The court interpreted “regular rate of pay” in Labor Code section 510 to mean “non-overtime.” Thus, when non-hourly compensation (like DART’s attendance bonus) is factored into an employee’s regular rate of pay, the calculation should only consider non-overtime hours the employee worked. Although the DLSE’s policy was not binding, it was persuasive in light of the agency’s expertise and competence in labor law. By including the total number of hours worked, including overtime hours, DART’s method led to an inverse relationship between an employee’s overtime hours worked and his or her regular rate of pay. DART’s method therefore undermined California’s policies of discouraging overtime work and favoring worker protection. Finally, the court rejected DART’s request for a prospective-only application of its holding.

Practical Implications: This decision has wide-ranging implications for all California employers that provide flat sum bonuses to employees. The prudent course would be for California employers to review their pay practices (and those of their payroll provider) to ensure compliance with the court’s holding. Because the court specifically provided for a retroactive application of its holding, California employers that have paid flat sum bonuses in the last four years should consider conducting a payroll audit.

Serrano v. Aerotek, Inc., 2018 WL 1452237 (Cal. Ct. App. Mar. 9, 2018)

Summary: California employers, including staffing agencies that provide temporary employees to their clients, are not required to police staff to ensure compliance with meal period obligations or investigate time records to uncover possible violations.

Facts: Defendant Aerotek, Inc., a Maryland staffing agency, hires temporary employees and places them with its clients. One of its clients is Bay Bread, LLC, a San Francisco food company. As part of the agreement between them, Bay Bread agreed to (1) control, manage, and supervise the work performed by Aerotek’s temporary employees, and (2) comply with all applicable federal, state and local laws in connection with the services provided by Aerotek and its temporary employees. Aerotek provided its employment policies and procedures handbook to Bay Bread, and required all of its temporary employees to undergo a jointly-held orientation located at Bay Bread’s facility. Plaintiff Serrano was hired by Aerotek and placed at a Bay Bread facility. She filed a putative class action against both Aerotek and Bay Bread for alleged failure to provide her and the putative class with meal periods in compliance with California law. She argued that liability for Bay Bread’s failure to provide lawful meal periods should extend to Aerotek because it (1) failed to ensure that Bay Bread complied with Aerotek’s meal period policy; (2) failed to investigate potential meal period violations shown on the putative class member’s time cards, and (3) was vicariously liable through the nondelegable duty doctrine. The trial court rejected Serrano’s claims on all three grounds. Aerotek maintained a lawful meal period policy, it did not take affirmative steps to impede or prevent its temporary employees from taking meal periods, and it instructed its temporary employees to report meal period violations to both Bay Bread and Aerotek. The trial court rejected plaintiff’s vicarious liability argument, finding it unpersuasive and cautioning that her line of reasoning would impose liability upon companies that maintain lawful policies and make every effort to ensure compliance with California law.

Court’s Decision: The California Court of Appeal affirmed, holding that Aerotek, by providing Bay Bread with its lawful meal period policies, and by contractually obligating Bay Bread to comply with California wage and hour laws, met its legal obligations. While the court stopped short of providing blanket immunization to staffing agencies that simply draft and provide a facially compliant policy to their clients, the court rejected the imposition of a higher standard for staffing agencies. Under California law, employers are not required to police staff to ensure meal periods are taken. By the same logic, the court rejected plaintiff’s argument that her time records, which showed late and missed meal periods, created a presumption that Aerotek violated the Labor Code. An employer’s knowledge of missed or late meal periods, without more, is insufficient to establish liability. Additionally, the court found plaintiff’s vicarious liability argument to be unpersuasive. First, the court found no evidence that Aerotek agreed to delegate its duty to provide meal periods to Bay Bread. Second, even if Aerotek had delegated its duty to provide meal periods to Bay Bread, the non-delegable duty doctrine provided no basis for which Aerotek would be liable for violations committed by Bay Bread. Third, nothing in the applicable wage orders or statutes supported a conclusion that an employer is liable for both its own violations and the unknown violations of a co-employer.

Practical Implications: This case is a good reminder to (1) review meal and rest period policies to ensure they are facially compliant with the California Labor Code; (2) encourage and provide a simple process for employees to report meal and rest period issues, and (3) train new hires and current employees on meal and rest period policies and obtain signed acknowledgements of training. Staffing agencies and their clients, as well as joint employers, should take the extra step of performing a joint review to establish, delineate or clarify each party’s guidelines and responsibilities.