Litigating California Wage & Hour Class and PAGA Actions - 22nd Edition

22nd EDITION Litigating California Wage & Hour Class and PAGA Actions

Seyfarth Shaw LLP | www.seyfarth.com Litigating CA Wage & Hour and Labor Code Class Actions (22nd Edition) Editor’s Note Regarding The 22nd Edition Since the turn of the century, Seyfarth attorneys have invested thousands of hours into this book. While we cannot list all the attorneys here, their efforts are sincerely appreciated. The fruit of their labor is this 22nd Edition of Litigating California Wage & Hour Class and PAGA Actions, a leading publication in the field. This 22nd Edition contains significant contributions from Co-Editors Phillip Ebsworth, Kerry Friedrichs, Timothy Hoppe, Justin Jackson, Leo Li, Bernard Olshansky, Romtin Parvaresh, David Rosenberg, Geoff Westbrook and Michelle Zakarian. Thank you to Andrew Paley for his leadership and guidance. We are also indebted to David Kadue for his many years of expert counsel. Christopher A. Crosman and Michael Afar, Editors in Chief Important Disclaimer This book is general commentary, not legal advice. We disclaim liability as to anything done or omitted in reliance on this publication. Readers should refrain from acting on any discussion in this publication without obtaining specific advice applying current law to particular circumstances. Thus, while we aim to provide authoritative information, this book is not legal advice. (From a Declaration of Principles adopted by a Committee of the American Bar Association and a Committee of Publishers and Associations.) Legal Notice Copyrighted © 2022. All rights reserved. Apart from fair use for private study or research permitted under copyright law, no part of this publication may be reproduced or transmitted without the prior written permission of Seyfarth Shaw LLP.

Seyfarth Shaw LLP | www.seyfarth.com Litigating CA Wage & Hour and Labor Code Class Actions (22nd Edition) i Table of Contents I. Introduction and Overview......................................................................................... 1 II. Common Exempt Misclassification Claims .............................................................. 2 A. Overview of State Overtime Law................................................................................ 2 B. The Executive (Managerial) Exemption...................................................................... 3 C. The Administrative Exemption.................................................................................... 7 1. General Overview ........................................................................................ 7 2. California Develops a Unique Interpretation of the Administrative/Production Dichotomy ..................................................... 8 3. The Administrative/Production Dichotomy Test Survives—Harris v. Superior Court ............................................................. 10 4. The Ninth Circuit Makes a Mountain out of the Administrative/Production Dichotomy Molehill ............................................ 11 D. The Outside Sales Exemption.................................................................................. 12 E. The Commissioned Salesperson Exemption ............................................................ 15 III. Independent Contractor Classification................................................................... 16 A. Dynamex Decision ................................................................................................... 16 1. Freedom From Control and Direction of the Hiring Entity................................................................................................ 18 2. Outside the Usual Course of the Hiring Entity’s Business .................................................................................................... 18 3. Customarily Engaged in an Independent Business .................................................................................................... 19 B. Post-Dynamex Cases .............................................................................................. 19 1. Curry v. Equilon Enterprises, LLC: Application of Dynamex to Joint Employer Analysis ......................................................... 19 2. Garcia v. Border Transportation Group, LLC .............................................. 20 3. Retroactivity of Dynamex: Vazquez v. Jan-Pro Franchising International, Inc. and Gonzales v. San Gabriel Transit .................................................................................... 20 C. Addition of the ABC Test to the Labor Code............................................................. 21 D. The Battle Over AB 5 ............................................................................................... 22 1. California Trucking Ass’n v. Bonta: AB 5 Enforced as to Motor Carriers .................................................................... 22 E. California Voters Adopt Proposition 22..................................................................... 23

ii  Litigating CA Wage & Hour and Labor Code Class Actions (22nd Edition) Seyfarth Shaw LLP | www.seyfarth.com IV. Unlawful Deductions from Wages........................................................................... 24 A. Generally ................................................................................................................. 24 B. Bonus Plan “Deductions”.......................................................................................... 25 C. Unlawful Commission Chargebacks......................................................................... 26 1. Nature of the Violation................................................................................ 26 2. Steinhebel Approves Certain Chargeback Plans ........................................ 27 3. Further Development of the Law Since Steinhebel .................................................................................................. 28 V. Reimbursement of Employee Expenses................................................................. 30 A. The Duty to Reimburse Expenses Under Labor Code Section 2802......................................................................................................................... 30 B. Reimbursement for Uniforms Under the Wage Orders ............................................. 33 VI. Meal and Rest Period Claims................................................................................... 34 A. Nature of Claims ...................................................................................................... 34 1. Employers Must “Provide” Meal Periods..................................................... 35 2. Employers Must “Authorize and Permit” Rest Periods....................................................................................................... 35 3. Meal and Rest Period Premium Pay........................................................... 36 B. Debate Over Whether One-Hour Payment Is a “Penalty” ......................................... 38 C. Meaning of “Provide” a Meal Period ......................................................................... 39 D. Limits on IWC’s Power to Alter Labor Code Meal Period Rules........................................................................................................................ 43 VII. Tip-Pooling................................................................................................................ 44 A. Actions Alleging Tips Were Diverted to Co-Workers Who Did Not Earn Them......................................................................................................... 44 B. Actions Alleging “Agents” of Management Wrongfully Took Tips.......................................................................................................................... 46 C. The Future of Tip-Pooling Cases Under California Law............................................ 47 VIII. Vacation/Paid Time Off Forfeiture ........................................................................... 48 IX. Waiting Time Penalties............................................................................................. 51 A. Generally ................................................................................................................. 51 B. Application to Fixed-Term and Temporary Employment ........................................... 53 1. Assignments for a Fixed Term.................................................................... 53 2. Temporary Employment Agencies.............................................................. 54

Seyfarth Shaw LLP | www.seyfarth.com Litigating CA Wage & Hour and Labor Code Class Actions (22nd Edition) iii X. Itemized Wage Statement Claims............................................................................ 55 A. Labor Code Section 226 .......................................................................................... 55 B. Purpose Of The Wage Statement Statute ................................................................ 56 C. The Supreme Court Approves Of Derivative Wage Statement Claims Based On Unpaid Meal And Rest Premiums ................................................ 57 D. Paid Sick Leave Must Be Recorded On Wage Statements ...................................... 57 E. Accrued Vacation Time Need Not Be Recorded....................................................... 58 F. Wage Statement Penalties....................................................................................... 58 G. The “Injury” Requirement For Wage Statement Penalties Is Weakened................................................................................................................ 59 H. The Requirement That Violations Be “Knowing And Intentional” ............................................................................................................... 60 XI. California Minimum Wage Claims ........................................................................... 61 A. Wage Averaging Improper Under California Law ..................................................... 61 B. The Conflict Between Piece-Rate Formulas and the Requirement to Pay Minimum Wage........................................................................ 64 C. Neutral Time-Rounding Practices Are Lawful ........................................................... 66 D. Compensability of Time Spent in Security Checks ................................................... 68 E. California’s Application of the De Minimis Doctrine................................................... 70 F. Compensability of Call-In Time for Standby Shifts.................................................... 72 XII. California Labor Code Private Attorneys General Act........................................... 73 A. General Scope of the Law........................................................................................ 73 B. Requirement to Exhaust Administrative Remedies................................................... 75 C. Scope of the “Civil Penalty” Provisions..................................................................... 79 D. Pursuing PAGA Claims Collectively Without Class Certification.............................................................................................................. 81 E. Whether PAGA Claims Can Be Stricken As Unmanageable .................................... 82 F. Release of PAGA Claims Through Class Settlement ............................................... 84 G. Wage Order Claims.................................................................................................. 86 H. Class-Like Discovery for PAGA Claims .................................................................... 88 XIII. Unfair Competition Claims, Business & Professions Code Section 17200 ......... 89 A. Former Law—Pre-Proposition 64 ............................................................................. 89 B. Reform of the Law—Passage of Proposition 64 ....................................................... 90 C. Proposition 64’s Restrictions on UCL Class Actions................................................. 91

iv  Litigating CA Wage & Hour and Labor Code Class Actions (22nd Edition) Seyfarth Shaw LLP | www.seyfarth.com XIV. Class Action Fairness Act of 2005 .......................................................................... 92 A. The Purpose of the Act ............................................................................................ 92 B. General Requirements ............................................................................................. 93 C. Removal Under CAFA.............................................................................................. 93 1. The Timeliness Requirement For A CAFA Removal..................................................................................................... 93 2. Premature Removal and Sanctions ............................................................ 94 3. Establishing The “Amount In Controversy” In A CAFA Removal .......................................................................................... 95 4. The Amount In Controversy Does Not Include Non-Class Action Claims............................................................................ 97 D. Exceptions to CAFA Jurisdiction .............................................................................. 98 1. Local Controversy Exception...................................................................... 98 2. Home State Exception................................................................................ 99 E. Waiver...................................................................................................................... 99 F. After Removal and Effect of Denial of Class Certification ....................................... 100 G. Settlement Process ................................................................................................ 101 XV. Class Certification .................................................................................................. 103 A. General Requirements ........................................................................................... 103 B. Class Certification in Exempt Misclassification Cases ............................................ 104 C. Subclasses ............................................................................................................ 108 D. Opt-In Classes ....................................................................................................... 109 E. Wal-Mart Stores, Inc. v. Dukes—The Supreme Court Shifts the Landscape of Class Certification ...................................................................... 111 1. Class Members Must All Suffer A Common Injury Capable Of Class-Wide Resolution .......................................................... 111 2. The Similarly Situated And Commonality Standards Are Not So Different ................................................................ 112 3. Dukes Presents An Early Evidentiary Hurdle For Plaintiffs ................................................................................................... 113 4. Individualized Issues Preclude Certification.............................................. 114 F. In Comcast v. Behrend, The Supreme Court Emphasizes That It Meant What It Said in Dukes ....................................................................... 115 1. The Supreme Court Holding..................................................................... 115 2. The Antitrust Claim................................................................................... 115 3. The District Court Opinion ........................................................................ 116

Seyfarth Shaw LLP | www.seyfarth.com Litigating CA Wage & Hour and Labor Code Class Actions (22nd Edition) v 4. The Third Circuit Decision ........................................................................ 116 5. The Supreme Court Applies its Holding to the Facts ........................................................................................................ 116 G. The California Supreme Court Enforces Due Process in Duran v. U.S. Bank ................................................................................................ 117 1. Lower Court Proceedings ......................................................................... 117 2. The Supreme Court Decision ................................................................... 118 3. What Duran Means For Employers .......................................................... 119 H. Easing of Class Certification Standards Post-Brinker ............................................. 120 I. Relitigation of Class Certification Denials ............................................................... 124 J. Defense Motions to Deny Class Certification (“Vinole Motions”) ................................................................................................................ 127 XVI. Discovery Issues in Class Actions........................................................................ 128 A. Disclosure of Class Member Names and Addresses to Allow Access to Potential Witnesses ............................................................................... 128 B. Discovery to Facilitate Location of Substitute Class Representatives ..................................................................................................... 132 C. Discovery Issues Regarding Putative Class Member Declarations ........................................................................................................... 136 1. Employers Must Approach Pre-Certification Communications With Their Employees With Caution..................................................................................................... 136 2. Protection Of Attorney Procured Witness Interviews From Discovery ....................................................................... 139 XVII. Class Action Settlement......................................................................................... 141 A. Generally ............................................................................................................... 141 B. Restrictions on Reversions of Settlement Funds .................................................... 141 C. Court Scrutiny of the Adequacy of the Settlement Amount ..................................... 144 D. Class Notice........................................................................................................... 147 E. Objection to Settlements ........................................................................................ 147 F. Individual Settlements with Putative Class Members.............................................. 148 XVIII. Class Action Waivers and Arbitration.................................................................. 151 A. Class Action Waivers and Arbitration Generally ..................................................... 151 B. The U.S. Supreme Court’s Epic Systems Decision ................................................ 152 C. The Supreme Court Holds That Class Arbitration Must Be Expressly Agreed Upon ......................................................................................... 153

vi  Litigating CA Wage & Hour and Labor Code Class Actions (22nd Edition) Seyfarth Shaw LLP | www.seyfarth.com D. The California Supreme Court’s Arbitration Waiver Exception for PAGA Claims.................................................................................................... 154 E. California Judicial Reactions to Iskanian and PAGA............................................... 155 1. California Appellate Courts Continue to Keep PAGA Claims out of Arbitration ................................................................ 155 2. Federal District Courts in California Initially Declined to Follow Iskanian’s PAGA Exception, but the Ninth Circuit Ended That Debate .................................................. 156 F. The Return of the U.S. Supreme Court – The Viking River Decision ................................................................................................................. 156 G.. Unconscionability Analysis Following Iskanian and Concepcion ............................................................................................................ 158 H. California Legislative Attacks on Employee Arbitration Agreements............................................................................................................ 159 I. Enforcement of Arbitration Agreements By Non-Signatory Third Parties........................................................................................................... 160 XIX. Individual Liability .................................................................................................. 160 A. No Individual Liability for Wages ............................................................................ 160 B. Individual Liability for Civil Penalties....................................................................... 162 XX. Out of State Employees Working Sporadically in California .............................. 164 Statutes of Limitations for Selected California Wage and Hour Claims ......................... 168 Table of Cases ..................................................................................................................... 173 Index of Terms ..................................................................................................................... 203

Seyfarth Shaw LLP | www.seyfarth.com Litigating CA Wage & Hour and Labor Code Class Actions (22nd Edition) 1 I. Introduction and Overview In 2000, a California wage and hour class action was very rare and a representative wage and hour action was unheard of. Things have changed dramatically. Class actions and representative actions are now ubiquitous. Currently, numerous such actions are filed every day in California courts. The reasons for this trend are essentially fourfold. First, California’s wage and hour laws differ from federal laws in various ways. Employers fully compliant with federal law often find themselves at odds with California law. Second, California procedural rules make it easier to file class actions. And employees can also file representative actions under the California Private Attorneys General Act of 2004, which does not impose class certification standards.1 In contrast, the federal Fair Labor Standards Act (“FLSA”) requires an “opt-in” procedure that tends to restrict the size of classes as compared to the “opt-out” class action procedure used in California. Third, California’s unfair competition law allows claimants to borrow violations of other laws and extend the limitations period to four years, making class actions even more lucrative for plaintiffs’ lawyers. Fourth, California Labor Code provisions typically allow for the recovery of prevailing-plaintiff attorney’s fees, creating additional incentives to sue. California Labor Code class and representative actions come in various forms and invoke evolving theories. Essentially, however, any Labor Code violation that can be tied to a corporate policy could support a class action. For that reason, the plaintiffs’ bar continues to devise new theories as to how wage and hour violations can support class and representative actions. This publication reviews the most common such claims and how the law has developed over the last twenty years or so. We do not, however, attempt to provide a comprehensive overview of California wage and hour law. Sections II through XI address the most common types of class and representative claims in California, such as claims for exempt classification, meal and rest period violations, and failure to reimburse expenses. Sections XII and XIII address peculiar provisions in California law that tend to expand potential damages recoverable in class actions, such as the Labor Code Private Attorneys General Act (“PAGA”) and the Unfair Competition Law (“UCL“). Sections XIV through XVIII address various aspects of class action procedure in California—the rules governing class certification, class discovery, class settlement, and class arbitration. Sections XIX and XX, finally, address some miscellaneous topics—individual liability and application of California wage and hour law to out-of-state employees. 1 According to the California Labor and Workforce Development Agency, there were 759 PAGA cases filed in 2005, and 3,137 in 2013. An Alternative to Employee Class Actions, L.A. Daily J. (Apr. 16, 2014). The Department of Industrial Relations reported that the LWDA received over 5,000 PAGA notices in the 2017-2018 fiscal year. 2019 Budget Change Proposal, PAGA Unit Staffing Alignment, 7350-110-BCP-2019-MR https://esd.dof.ca.gov/Documents/bcp/1920/FY1920_ORG7350_BCP3230.pdf (last accessed on June 6, 2022).

2  Litigating CA Wage & Hour and Labor Code Class Actions (22nd Edition) Seyfarth Shaw LLP | www.seyfarth.com II. Common Exempt Misclassification Claims The first wave of California class actions primarily challenged the exempt status of groups of employees holding the same job. The plaintiffs argued that the employer had engaged in a common practice of misclassifying a group of employees as exempt from overtime pay and other requirements, thus entitling all employees in the group to recover overtime pay, interest, and associated statutory penalties.2 The following discussion addresses issues arising around the misclassification of employees under various available exemptions. A. Overview of State Overtime Law3 Before January 1, 2000, the California Industrial Welfare Commission (“IWC”) was the body authorized by statute to set overtime requirements. It acted in a quasi-legislative capacity, promulgating a series of “Wage Orders“ that set rules for wages, hours, and working conditions that differed slightly from one industry to another. The IWC eliminated daily overtime from the Wage Orders in 1997.4 In response, in 1999 the Legislature passed AB 60, which inserted new provisions in the Labor Code to provide for daily overtime and to enshrine various employee protections that cannot be altered by the IWC.5 The Wage Orders remain in effect, but the IWC cannot promulgate rules within the Wage Orders that conflict with the Labor Code itself.6 Under Labor Code Section 510, employees are entitled to one and one-half times the regular rate7 of pay when they work more than eight hours in a single day, more than forty hours in a workweek, or during the first eight hours of the seventh consecutive day of a single workweek.8 Employees are entitled to double time when 2 Punitive damages are not recoverable when liability is premised solely on Labor Code wage and hour violations. Brewer v. Premier Golf Props., 168 Cal. App. 4th 1243, 1252 (2008). 3 California employers calculating overtime pay should know that the “regular rate” used to calculate overtime premium pay may differ from the straight-time rate. The regular rate “can change from pay period to pay period, includes adjustments to the straight time rate, reflecting, among other things, shift differentials and the per-hour value of any non-hourly compensation the employee has earned.” Alvarado v. Dart Container Corp. of California, 4 Cal. 5th 542, 554 (2018). In Alvarado, the California Supreme Court held that the methodology for calculating the regular rate can differ from that applied under the FLSA. Alvarado held that “flat sum” attendance bonuses (and likely other “flat sum” bonuses that do not increase in proportion to hours worked) “should be factored into an employee’s regular rate of pay by dividing the amount of the bonus by the total number of non-overtime hours actually worked during the relevant pay period and using 1.5, not 0.5, as the multiplier for determining the employee's overtime pay rate.” Id. at 573. 4 Collins v. Overnite Transp. Co., 105 Cal. App. 4th 171, 176 (2003). 5 See, e.g., Lab. Code § 510 (daily overtime requirement) and Lab. Code § 226.7 (meal and rest period requirements). Note that Labor Code section 510 does not apply to employees covered by a valid collective bargaining agreement if “the agreement expressly provides for the wages, hours of work, and working conditions of the employees” and “provides premium wage rates for all overtime hours worked and a regular hourly rate of pay for those employees of not less than 30 percent more than the state minimum wage.” Lab. Code § 514; see also Vranish v. Exxon Mobil Corp., 223 Cal. App. 4th 103 (2014) (affirming trial court ruling that employer: (1) properly paid overtime under the terms of a collective bargaining agreement; and (2) was exempted from Labor Code section 510 pursuant to Labor Code section 514). 6 Collins, 105 Cal. App. 4th at 178-80 (Wage Orders and Labor Code should be read together to understand scope of wage and hour regulation of California employees). 7 Recently, the Ninth Circuit held that per diem payments to employees must be factored into calculating an employee’s regular rate of pay for purposes of overtime compensation. Clarke v. AMN, 987 F.3d 848 (9th Cir 2021) 8 Note that employers may assign employees to work schedules that differ from company’s designated workweek or workday and base overtime calculations on the designated workweek or workday as long as the schedule is not established for the purpose of evading lawful overtime requirements. Seymore v. Metson Marine, 194 Cal. App. 4th 361 (2011).

Seyfarth Shaw LLP | www.seyfarth.com Litigating CA Wage & Hour and Labor Code Class Actions (22nd Edition) 3 they work more than twelve hours in a single day or more than eight hours on the seventh consecutive day of a single workweek.9 They can also apply in certain situations to non-resident employees who perform work in California for California employers.10 Individual employees have a private right of action for unpaid overtime. Typically, a plaintiff invokes a private right of action by alleging violation of Labor Code Section 510 or a provision of the governing IWC order. Such a claim does not depend on the Fair Labor Standards Act or other federal law. A prevailing plaintiff may recover attorney’s fees for an overtime claim,11 but California law, unlike the FLSA, does not provide a remedy of double damages for willful overtime violations.12 In a private action for unpaid overtime compensation under the Labor Code, the statute of limitations reaches back to three years before the date the lawsuit is filed in court.13 B. The Executive (Managerial) Exemption One claim frequently made in misclassification class actions is that a proposed class of exempt managers—most often “working managers” in a retail establishment—do not qualify for the “executive” (aka “managerial”) exemption. The FLSA and California law contain similar executive exemptions, but California’s is more restrictive in key respects. California requires that an “executive” employee be paid a higher level of compensation than required under the FLSA.14 The salary must be set at a level at least twice the California minimum wage, which, as of 2022, is $15 per hour.15 Accordingly, to satisfy the salary basis test in California, a manager must now be paid $62,400 per year. The other executive-exemption requirements are that the manager must: (1) have the power to hire and fire, or make recommendations on those topics that are given particular weight; (2) supervise at least two full-time equivalent positions; 9 Previously, employees and employers could agree in advance to a “specific mutual wage agreement” that provided a guaranteed salary covering both base hours and a specific number of overtime hours. Archiega v. Dolores Press, Inc., 192 Cal. App. 4th 567, 571 (2011) (quoting Ghory v. Al-Lanham, 209 Cal. App. 3d 1487, 1491 (1989)). But then the Legislature amended Labor Code section 515 to preclude the use of such agreements. Lab. Code § 515(d) (2). 10 The California Supreme Court in Sullivan v. Oracle Corp., 51 Cal. 4th 1191 (2011), held that California overtime laws apply to out-of-state employees who perform work “entirely in California” for extended periods of time–“entire days and weeks.” See Section XX. 11 Only the prevailing employee, not the prevailing employer, may recover attorney’s fees in an action for overtime pay or for unpaid minimum wages. Earley v. Superior Court, 79 Cal. App. 4th 1420 (2000). 12 But see Lab. Code § 1194.2 (providing double damages for minimum wage violations). 13 As explained in Section XIII and in Statutes of Limitations for Selected California Wage and Hour Claims, the limitations period can be extended to four years by pleading a companion claim under the state Unfair Competition Law, Bus. & Prof. Code § 17200, et seq. 14 FLSA regulations set the salary threshold at $684 per week ($35,568 annually). Employers can use commissions and nondiscretionary bonuses to satisfy up to 10% of the salary threshold. 15 The California minimum wage rose to $15.00 per hour on January 1, 2022, and will rise to $15.50 on January 1, 2023. The federal minimum wage has remained at $7.25 per hour since 2009.

4  Litigating CA Wage & Hour and Labor Code Class Actions (22nd Edition) Seyfarth Shaw LLP | www.seyfarth.com (3) “primarily” be engaged in managerial duties; and (4) “customarily and regularly“ exercise discretion and independent judgment.16 Most litigation in California arises out of element (3) above, because the California Supreme Court in Ramirez v. Yosemite Water Co.17 held that an employee meets element (3) only when the employee spends more than onehalf of the work time on exempt duties. By contrast, under the FLSA’s executive exemption, the employer need only establish that management is the employee’s “primary duty,” an element that focuses on the relative importance of the duty rather than just the amount of time devoted to the duty.18 Beyond emphasizing the percentage of work time that must be devoted to exempt duties, California case law has not extensively explained just which duties qualify as exempt “managerial work.” Since July 2000, however, the Wage Orders have expressly incorporated by reference the then-existing FLSA regulations defining “managerial” duties.19 Accordingly, federal authority construing those specific regulations is highly relevant in interpreting the California executive exemption.20 Examples of exempt work set forth in the federal regulation include interviewing, selecting and training employees, setting and adjusting pay rates and work hours, directing work, keeping production records for subordinates, evaluating employees’ efficiency and productivity, handling employee complaints, disciplining employees, planning work, determining techniques to be used, distributing work, deciding on types of materials, supplies, machinery and tools to be used or merchandise to be bought, stocked, and sold, controlling the flow and distribution of merchandise and supplies, and providing for employee safety.21 16 See IWC Wage Order 1-2001(1) (A) (1); Nordquist v. McGraw-Hill Broad. Co., 32 Cal. App. 4th 555, 573 (1995) (“‘Discretion and independent judgment’ within the meaning of IWC Order No. 11-80 involves the comparison of possible courses of conduct, and acting after considering various possibilities. It implies that the employee has the power to make an independent choice free from immediate supervision and with respect to matters of significance ... [meaning matters] of substantial significance to the policies or general operations of the business of the employer.”). 17 20 Cal. 4th 785 (1999). 18 Id. at 797; see also Baldwin v. Trailer Inns, Inc., 266 F.3d 1104, 1113-16 (9th Cir. 2001) (although store managers spent less than one-half of their time on duties that met the federal executive exemption, they still qualified as exempt because management was found to be their “primary” or most important duty). 19 29 C.F.R. § 541.102; Safeway Wage & Hour Cases, 43 Cal. App. 5th 665, 676 (2019). 20 See, e.g., United Parcel Serv. Wage & Hour Cases, 190 Cal. App. 4th 1001, 1015 (2010) (“Federal law interpreting similar components of the FLSA exemptions is properly considered as persuasive authority, even if not binding on this court. … As such, we may properly consider federal decisions interpreting the FLSA and the federal Department of Labor's implementing regulations as set forth in the Code of Federal Regulations that were in effect as of January 1, 2001”); Bldg. Material & Constr. Teamsters Union v. Farrell, 41 Cal. 3d 651, 658 (1986) (“Federal decisions have frequently guided our interpretation of state labor provisions the language of which parallels that of federal statutes.”); Alcala v. Western Agric. Enters., 182 Cal. App. 3d 546, 550 (1986) (“It has been held that when California’s laws are patterned on federal statutes, federal cases construing those federal statutes may be looked to for persuasive guidance.”). 21 29 C.F.R. § 541.102. Although the FLSA regulations were updated in 2004, the definition of exempt “executive” work has remained substantially the same for decades.

Seyfarth Shaw LLP | www.seyfarth.com Litigating CA Wage & Hour and Labor Code Class Actions (22nd Edition) 5 Seyfarth Shaw has successfully defended many cases where liability turned on whether a particular job duty qualifies as exempt or non-exempt. Those cases often have turned on careful analysis of similar duties under the FLSA regulations that are expressly incorporated into the Wage Orders. For example, we defended a case for a large HMO that turned on whether working pharmacy managers were misclassified as exempt executives. A main manager duty was to check the work of pharmacy employees for medication errors in filling prescriptions—a duty also performed by licensed pharmacists who were not managers. We have obtained summary judgment by relying on numerous cases holding that: (1) a manager checking another employee’s work for compliance with a standard qualifies as exempt “supervision”;22 (2) it does not alter the analysis that non-managers also perform the same task.23 Another federal regulation expressly incorporated into the IWC Wage Orders is (former) 29 CFR section 541.108, which defines exempt work to include all work that is “directly and closely related to exempt work.” The FLSA regulation explains that this concept allows seemingly non-exempt duties to be treated as exempt duties: [It] brings within the category of exempt work not only the actual management of the department and the supervision of the employees therein, but also activities which are closely associated with the performance of the duties involved in such managerial and supervisory functions or responsibilities. The supervision of employees and the management of a department include a great many directly and closely related tasks which are different from the work performed by subordinates and are commonly performed by supervisors because they are helpful in supervising the employees or contribute to the smooth functioning of the department for which they are responsible. Frequently such exempt work is of a kind which in establishments that are organized differently or which are larger and have greater specialization of function, may be performed by a non-exempt employee hired especially for that purpose.24 In other words, non-discretionary work can be “directly and closely related“ to exempt work—and hence itself considered exempt work—even if it is not truly essential to the exempt work,25 and even if it is work that need not 22 See Sturm v. Toc Retail, Inc., 864 F. Supp. 1346, 1351 (M.D. Ga. 1994) (convenience store manager checking for employees’ compliance with “Majik Market dos and don’ts” was exempt supervision even though often performed by senior clerks as well as the manager); see also Baldwin, 266 F.3d at 1117 (trailer park managers’ duty of ensuring that park employees followed company policy was supervisory and, therefore, exempt work); Beauchamp v. Flex-N-Gate LLC, 357 F. Supp. 2d 1010, 1015-17 (E.D. Mich. 2005) (supervisory duty for a plant manager to “ensur[e] that employees in their charge actually meet [company] standards in their daily work”); Thomas v. Speedway SuperAmerica, LLC, 506 F.3d 496, 499 (6th Cir. 2007) (manager of Speedway gas station/convenience store had primary duty of management, although she spent 60% of her time on non-managerial tasks performed by nonexempt employees); Jones v. Va. Oil Co., 69 Fed. App’x 633, 637 (4th Cir. 2003) (holding that Dairy Queen manager had primary duty of management, where manager spent approximately 75–80% of her time carrying out basic line-worker tasks because “while [she] was doing line-worker tasks, she also engaged in the supervision of employees, handled customer complaints, dealt with vendors, and completed daily paperwork”). 23 Sturm, 864 F. Supp. 1346; see also Baldwin, 266 F.3d at 1115 (“[Having non-exempt employees perform] managerial tasks does not render the tasks non-exempt.”); Sepulveda v. Wal-Mart Stores, Inc., 237 F.R.D. 229, 239 (C.D. Cal. 2006), aff’d, 464 Fed. App’x 636 (2011) (“[T]he (assistant managers) seem to consider any task performed by an hourly employee to be a non-exempt task. That is not the law.”). 24 Former 29 C.F.R. § 541.108(a). 25 Harrison v. Preston Trucking Co., 201 F. Supp. 654, 658-59 (D. Md. 1962) (“[T]he test is not whether the work is essential to the proper performance of the more important work, but whether it is related. Thus, notemaking, by a consultant when

6  Litigating CA Wage & Hour and Labor Code Class Actions (22nd Edition) Seyfarth Shaw LLP | www.seyfarth.com be performed by managers.26 As long as the work is related to a management function, it is considered to be exempt. These regulations support arguments that activities appearing to be non-exempt in the abstract may be considered exempt if they are undertaken to effectuate exempt functions of a manager’s job. Another important issue in these cases that Ramirez does not resolve is how one applies the purely quantitative approach to time spent simultaneously performing exempt and non-exempt tasks: Is this time exempt, nonexempt, or some combination of the two? Under federal law, a manager might concurrently be engaged in handson, non-exempt type work and be monitoring the operation of a business for managerial purposes (e.g., pouring coffee at a restaurant while directing work).27 Employers received a different answer under California law in Heyen v. Safeway, Inc.,28 in which the Court of Appeal considered whether the concurrent performance of both exempt and non-exempt work could be counted toward time spent performing exempt work. Heyen noted that the federal regulations look to the supervisor's reason or purpose for undertaking the task. If a task is performed because it is “helpful in supervising the employees or contribute[s] to the smooth functioning of the department for which [the supervisors] are responsible” (§ 541.108(a), (c)), the work is exempt; if not, it is nonexempt. Heyen found that the federal regulations incorporated into the Wage Orders do not support the “multi-tasking” or “hybrid” activity standard urged by the employer. A task is either exempt or nonexempt, and the “trier of fact must categorize tasks as either “exempt” or “nonexempt” based on the purpose for which [the employee] undertook them.” For example, “a department manager or buyer in a retail or service establishment who goes about the sales floor observing the work of sales personnel under his supervision to determine the effectiveness of their sales techniques, checking on the quality of customer service being given, or observing customer preferences and reactions to the lines, styles, types, colors, and quality of the merchandise offered, is performing work which is directly and closely related to his managerial and supervisory functions.” Such work is exempt. “His actual participation, except for supervisory training or demonstration purposes, in such activities as making sales to customers, replenishing stocks of merchandise on the sales floor, removing merchandise from fitting rooms and returning to stock or shelves, however, is not.’”29 standing alone or separated from his primary duties, would be routine and, hence, not directly and closely related within the meaning of the regulations, but at the same time such work is necessary to the proper performance of his primary duties and thus is considered to be ‘directly and closely related’ when performed by the consultant.”). 26 Adams v. United States, 36 Fed. Cl. 91, 98 (1996) (“A supervisor does not become non-exempt merely by doing tasks which are incidental to his main work, even if non-supervisory workers might perform them as well. The question is whether a supervisor engages in those tasks because he is a supervisor.”). 27 See Donovan v. Burger King Corp., 672 F.2d 221, 225-26 (1st Cir. 1982). The 2004 FLSA regulations added a new regulation entitled “concurrent duties,” 29 C.F.R. § 541.106, explaining that a manager is engaged in exempt managerial work when he is engaged simultaneously in exempt and non-exempt work. But this regulation has not been incorporated into the IWC regulations. 28 216 Cal. App. 4th 795 (2013). 29 Id. at 820-821.

Seyfarth Shaw LLP | www.seyfarth.com Litigating CA Wage & Hour and Labor Code Class Actions (22nd Edition) 7 As later decisions have recognized, this is not to say that certain tasks are always considered exempt or nonexempt - the purpose for which the task is performed must be analyzed. For example, in Bates v. Safeway, Inc.,30 the Court of Appeal explained that Heyen “did not state ... that the same task must always be labeled exempt or nonexempt: “[I]dentical tasks may be ‘exempt’ or ‘nonexempt’ based on the purpose they serve within the organization or department. Understanding the manager’s purpose in engaging in such tasks, or a task’s role in the work of the organization, is critical to the task’s proper categorization. A task performed because it is ‘helpful in supervising the employees or contribute[s] to the smooth functioning of the department’ is exempt, even though the identical task performed for a different, nonmanagerial reason would be ‘nonexempt.’”31 While California’s standard is more difficult to satisfy than the federal standard—which credits as non-exempt work the “hybrid” performance of exempt and non-exempt tasks—the California standard nonetheless allows for strategic arguments to oppose class certification. For example, Seyfarth defeated certification of putative class claims where the plaintiff had relied on Heyen and its progeny to argue that hybrid performance of exempt and non-exempt tasks could not support exempt status.32 In denying certification, the court found that the Heyen test created individualized inquiries: [C]ategorizing the activity will depend on the purpose for which the manager undertook the sale. It will be exempt if it was helpful in supervising the employees or contributed to the smooth functioning of the department. It will be nonexempt if the manager simply was performing work of the same kind as her subordinates. The upshot of this discussion is that misclassification under this theory cannot be determined on a classwide basis simply by looking to the overlap in tasks performed by managers and subordinates.33 C. The Administrative Exemption 1. General Overview Like the FLSA, California wage and hour law recognizes an administrative exemption to overtime requirements.34 To qualify for this exemption in the most common circumstances,35 the employer must establish the following four elements: (1) More than 50% the employee’s work time involves the performance of office or non-manual work directly related to the employer’s management policies or general business operations. 30 10 Cal. App. 5th 440 (2017). 31 Bates, 10 Cal. App. 5th at 474 (citing Heyen, 216 Cal. App. 4th at 822-823). 32 Patel v. Nike Retail Servs., Inc., Case No. 14-cv-4781-RS, 2016 WL 1241777 (N.D. Cal. Mar. 29, 2016). 33 Id. at *11. 34 See, e.g., Wage Order 7-2001 § 1(A) (2). 35 There are alternative bases to qualify for the administrative exemption such as through regularly and directly assisting a proprietor or performing administrative function in a school system, but those alternative bases rarely lead to class litigation.

8  Litigating CA Wage & Hour and Labor Code Class Actions (22nd Edition) Seyfarth Shaw LLP | www.seyfarth.com (2) The employee customarily and regularly exercises discretion and independent judgment in carrying out job duties as to matters of significance to the business.36 (3) The employee performs his or her job only under general supervision and works along specialized or technical lines in work requiring special training, experience, or knowledge. (4) The employee is paid a salary37 equivalent to at least twice the state minimum wage.38 As with the executive exemption, the relevant provisions in the Wage Orders on the administrative exemption have, since 2001, incorporated several FLSA regulations by reference. As a result, decisions interpreting the federal administrative exemption often provide persuasive guidance to California courts interpreting the California administrative exemption.39 Nonetheless, as explained below, California’s interpretation of the administrative exemption departs in some ways from the way the administrative exemption has been interpreted in most other jurisdictions. 2. California Develops a Unique Interpretation of the Administrative/Production Dichotomy A commonly litigated issue under the administrative exemption is whether the employees at issue are working in an “administrative” capacity or in a “production“ capacity. Generally speaking, only employees in the former group are eligible for the exemption. This distinction between production and administrative workers is sometimes referred to as the “administrative/production dichotomy.” One of the few class actions that actually went to trial in California, Bell v. Farmers Insurance Exchange,40 challenged whether certain insurance adjusters qualified for the administrative exemption. The plaintiffs prevailed on the basis that the insurance adjusters failed, on a classwide basis, to qualify for the administrative exemption. The plaintiffs’ success in Bell inspired numerous other challenges to the exempt status of insurance adjusters. Bell addressed the “administrative/production dichotomy”41 and examined FLSA regulations and case law that distinguish between “administrative work“ (which can qualify as exempt work under the exemption) and “production work” (which cannot qualify).42 36 Some courts mistakenly hold that employees must exercise discretion and independent judgment more than 50 percent of the time. In fact, the term “customarily and regularly“ is defined in the FLSA regulations that are incorporated in the Wage Orders as “more than occasionally but less than constantly.” It is generally established by showing that a duty is carried out on a recurrent, non-sporadic basis. See Baca v. United States, 29 Fed.Cl. 354 (U.S. Fed. Cl. 1993) (doing exempt duties only one-third of the total work time, but on a regular recurring basis, qualified as performing the task “customarily and regularly”). 37 Recently, the Court of Appeal held that employees compensated solely on commissions do not satisfy the salary basis test for the administrative exemption. Semprini v. Wedbush, 57 Cal. App. 5th 246, 252-253 (2020). 38 Wage Order 7-2001 § 1(A)(2)(f). 39 Combs v. Skyriver Communications, LLC, 159 Cal. App. 4th 1242, 1254-55 (2007) (recognizing that the incorporation of FLSA regulations was intended to make the California exemption “closely parallel the federal regulatory definition of the same exemption”). 40 87 Cal. App. 4th 805 (2001). 41 Id. at 811-12. 42 See, e.g., Dalheim v. KDFW-TV, 918 F.2d 1220, 1230 (5th Cir. 1990) (“The distinction § 541.205(a) draws is between those employees whose primary duty is administering the business affairs of the enterprise from those whose primary

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