California Wage and Hour Compliance

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California leads the nation in lawsuits directly related to labor and employment violations. With no caps on damages employers can be subject to significant monetary judgments. Employers in violation of Wage and Hour laws can incur considerable costs, including civil damages, monetary penalties, attorney fees and other expenses.

CALIFORNIA EXEMPT VS NON-EXEMPT

Wage and Hour laws divide employees into two categories – exempt and non-exempt.  California Wage and Hour laws only apply to non-exempt employees. The following key distinctions differentiate exempt and non-exempt employees.

EXEMPT

• Not eligible for overtime
• Not provided required rest and meal breaks
• Paid twice the minimum hourly wage based on a 40-hour workweek
• Can be required to work more than 40 hours weekly without overtime pay
• 50% or more of their work is executive, administrative or professional
• Regularly employs independent judgment on the job
• Manages a business or a department
• -Regularly directs two or more full-time employees
• Has the authority to hire and fire or make recommendations
• Decides promotions and wage changes
• Examples of exempt employees include executives, administrative and licensed professionals like doctors, outside salespeople, and computer professionals

NON-EXEMPT

• Do not meet the aforementioned requirements for exempt status
• Qualified for overtime, rest and meal breaks
• Subject to California’s minimum wage laws
• Paid on a wage and hourly basis as their responsibilities do not qualify for overtime exemption.

It is important to note that exemption status can change if job duties change. 

MINIMUM WAGE AND OVERTIME

In 2021, the California Minimum Wage for employers with 26 or more employees is 14.00 and will increase a dollar per year through 2023. For 25 employees or less it’s 13.00, increasing a dollar per year until 2023 when it reaches 15.00. Overtime is paid to non-exempt employees over 18 (or 16 if legally allowed) under these circumstances:

• After 8 hours worked per day the employee is paid time and a half
• After 40 hours worked per week the employee is paid time and a half
• Time and a half is paid for the first 8 hours on the 7th consecutive day worked 
• Double time pay for work beyond 12 hours
• Double time pay for work on the 7th consecutive day beyond 8 hours

Employers are not required to provide paid or unpaid vacation. So if an employee works 40 hours in a workweek and in addition takes a vacation of one eight hour day, those eight hours do not count toward overtime pay. Discretionary bonuses like an annual holiday bonus cannot be used to satisfy overtime requirements or any portion of the salary requirement because they are not measured by production or hours worked.

Incentive pay is a nondiscretionary bonus based on performance above hourly wages and salary. If paid to a nonexempt employee it is calculated as overtime as it’s part of the employee’s standard rate of pay. So for example, an employee’s commissions received satisfy overtime requirements when they equal or exceed earnings employees would have received by the state’s overtime requirements.

Commissions are narrowly defined as compensation based on a percentage of the price of the product or service sold. They must be paid twice monthly. Whether commissions are the employees’ sole source of compensation or in addition to their salary or standard pay rate, they must equal or exceed minimum wage.

During a pandemic or otherwise, employers may not reduce salaried employees and non-exempt employees below their minimum salary and hourly levels. Also, if an employee was on track to earn wages based on expected commissions when they were terminated during a pandemic or for any reason, the employer must compensate the portion earned.

REST AND MEAL BREAKS

Rest and Meal Breaks must be provided to employees with the following standards:

• 30-minute meal break for more than 5 hours per day           
• (Can be mutually waived if daily total isn’t more than 6)
• 2nd 30-minute meal break for more than 10 hours per day (Can be mutually waived if daily total is less than 12 hours and 1st meal period was not waived)
• 10-minute rest periods for any 4-hour work period                                
• (Must be counted as time worked and paid time)
• Violations per workday require 1 additional hour of pay to employee’s check at employee’s regular rate

Healthcare employees working more than 8 hours in a day may waive the right to one of the two meal periods in a written notice.  Collective bargaining agreements create exemption from California's meal period provisions for employees like construction workers, security officers, and gas and electric company workers.

Types of Compensation

Holidays are treated as normal workdays and no extra pay is required for work done on these days. Vacation Pay is not required. However, if an employer does provide it, unused vacation time counts as wages.

Time Pay is required when employees arrive to work expecting a certain number of hours but due to scheduling or lack of notice don’t work their full schedule. Employees that work less than half of their scheduled time must be paid for half of the scheduled time.  Time Pay cannot be less than 2 hours nor more than 4 hours. Time Pay is made only when an employer ends the shift before half is completed. For any further work, the employee is paid their standard rate for the time worked.

Sick Leave pay of 24 hours (3 days) is required to be paid per 12-month period for full-time employees.  Employees earn this compensation at a rate of a single hour for every 30 hours worked. Newly hired employees may begin using accrued time on their 90th day. Sick Leave pay carries over to the next year but employers can put a cap on the total amount of accrued sick leave at 48 hours or 6 days.

Piecework is work paid for a set rate per unit for completing goods or a task.  It must equal or exceed the state's minimum wage for all hours worked.  Severance Pay is not mandated. Employers that choose to pay severance must do so under the terms of their current policy or employment contract.

There is not a reduced minimum wage rate for tipped employees in California. Since tips are not provided by the employer, they cannot be used to satisfy overtime requirements. However, mandatory service charges based on an agreement are not voluntary and thus can be included in the regular hourly pay rate for overtime. Subminimum wage laws grant employers to compensate below standard minimum wage to apprentices and properly licensed employees with disabilities.

Trainees with no previous job related experience may be paid a subminimum wage no less than 85% of the standard minimum wage for their first 160 hours. Student learners may not be paid less than the standard minimum wage unless exempt.

A split shift is when an employee's work schedule is interrupted by a nonpaid, nonworking period of more than 60 minutes. When this occurs the employee is entitled to one additional hour of pay at no less than the minimum-wage rate. This is not required if the employee's payday exceeds minimum wage. For example, an employee works an eight-hour split shift and minimum wage is 14.00.  With the one hour premium the employee’s pay is 136.00. However, if their hourly rate was 18.00 an hour for that eight-hour shift equaling 144.00, it exceeds the minimum wage and the premium would not need to be paid.

On-Call also known as Call-Back or Standby Time is compensable when an employee is subject to the employer's control at the worksite. Employees must be paid their standard hourly rate and overtime if subject to the following restrictions:

• Excessive geographic restrictions on the employee’s movements
• Frequency of calls are unreasonably restrictive
• Fixed time limit for response is unreasonably restrictive
• Ease for the On-Call employee to trade On-Call responsibilities with another employee

Whether the employee participates in personal activities during the On-Call periods can mitigate the time worked.

California employees may request to work longer hours on another day to make up the missed time without incurring overtime provided they have written approval. These requests may not be encouraged. If allowed, the time must be made up in the same workweek.  Makeup time must not exceed 40 hours in a week or 11 hours in a day.

Travel Time must be paid if non-exempt employees are required to travel for work activities during work hours. This includes any mode of transportation such as a plane or in the company car or in their car except for commuting. They must be paid at least minimum wage and these hours must be counted when calculating overtime. For 2021, non-exempt employees will receive 56 cents per mile driven for business use in addition to minimum wage. Employers need to check annually for changes.

The employee and employer may instead decide upon a fixed amount known as the lump sum method that covers all incurred expenses.

INDEPENDENT CONTRACTORS

The ABC Test used by the California Supreme Court determines independent worker status when they are free from control and direction, perform work outside the usual course of business and are independently established in that trade. Labeling a worker as an independent contractor, even with a written agreement, will not avoid the labor laws on overtime pay and it can result in misclassification fines or lawsuits.

For example, California Assembly Bill No. 5  (AB-5), effective on January 1, 2020 prevents misclassification of on-demand workers like Uber drivers. This entitles them to unemployment insurance, minimum wage and other employee benefits. During a pandemic, businesses that use independent contractors or staffing agencies must ensure that these entities follow state guidelines or they may face joint employment classification claims.

STANDARDS FOR PAYMENT

The California Labor Code determines Wage Standards such as how employees wages are calculated, determinations of hours worked and rules on deductions. For example, deductions and garnishments on wages must be either authorized by the employee in writing or permitted by law.  Wage orders are the rules for employers established by California’s Industrial Welfare Commission (IWC).  They pertain to minimum wages, working conditions, overtime breaks and more. California employers must use both the labor code and wage orders to be compliant.

HOW AND WHEN EMPLOYEES MUST BE PAID

Wages earned the 1st through the 15th must be paid no later than the 26th day of the month the employee worked. Wages earned the 16th through the final day of the month must be paid by the 10th day of the following month. Other payroll periods require payment within seven calendar days from the end of the payroll period in which wages were earned. Regardless of payment form, California is one of the few states that require a detachable part of the check or a separate writing to show required information.

Terminated employees must be paid all unpaid wages at termination including unused vacation or other paid time off. Employees who quit also receive all unpaid wages unless they do not give more than 72 hours' notice. During a pandemic when businesses may have to downsize, the Worker Adjustment and Retraining Notification requires employers to provide employees 60-day notice.

APPLICABLE LAWS

Federal and state law interrelate at times regarding Wage and Hour laws such as

• The federal Fair Labor Standards Act (FLSA)
• The California Labor Code
• Wage Orders created by California’s Industrial Welfare Commission (IWC)

The IWC is not currently in operation. However wage orders are still enforced by the California Division of Labor Standards Enforcement (DLSE). 

HOW TO COMPLY

The pandemic increased the number of employees working from home and thus increased claims for unpaid wages and failure to pay overtime. Organizations should give written notice that non-exempt employees properly document work hours, rest, and meal breaks.  Employees should work only when scheduled and get prior approval for overtime. 

During a pandemic, employers should expect worker’s comp lawsuits.  Newly enacted standards presume most workers to be covered by the worker’s comp system. Compensate employees for mask, cell phone, Wi-Fi and office supply expenses.  Employers may set a monthly flat stipend. Ensure that wages and overtime pay reflect Hazard Pay increases for essential workers. Employers with fewer than 500 employees need to adhere to the Federal Families First Coronavirus Relief Act and keep separate pay categories to stay compliant. Create and consistently update a well-crafted employee handbook to reflect and adhere to ever changing California labor laws.

Where applicable, have both parties sign a commission compensation agreement that specifies how commissions are to be paid.

Make payroll records available for inspection for at least three years at the place of employment or location within California. Post notice of paydays and the time and location of payment. The notice must be located where employees frequently congregate such as a break room.

Upon hire, employers must provide the extensive list of documents required under the California Wage Theft Protection Act. If there are any additions or changes to these documents required under the California Wage Theft Protection Act, employers must notify nonexempt employees in writing.

CONSEQUENCES

Penalties for breaking the law can be severe.  In 2019, a major US retailer was ordered to pay $102 million dollars in fines for various Wage and Hour violations.

Failure to pay an employee's wages includes a $100 penalty for the first violation, and for each failure to pay each employee. Consequent violations or any willful violations are $200 per employee plus 25 percent of the amount unlawfully withheld. California's Private Attorneys General Act (PAGA) allows employees to sue over new claims for labor code violations. With PAGA, employees may not sue for penalties in addition to those mentioned previously. However in prevailing PAGA action employees may receive attorney fees and court costs.

Executives can be subject to individual liability if it’s found they attempted to circumvent the law. Intentional violations may not be covered by liability insurance.  Misclassifying employees and subsequently paying wages incorrectly can lead to class action suits for unpaid wages, overtime, interest, damages, lawyer and court costs.

CONCLUSION

California businesses can create an environment where employees feel valued, are paid timely, accurately and in accordance with the law. Every employee wants to know the work they do matters and is compensated as agreed. Taking the time to execute a plan to follow wage and hour laws will save the organization time and money and keep employees working for the companies they love in the great state of California.