Today the Department of Labor (DOL) increased the minimum salary that employees must make in order to be exempt from overtime requirements under federal law. The increase -- to $35,568 in annualized salary -- is significantly lower than the minimum that the Obama DOL attempted to adopt several years ago.
Federal overtime and minimum wage protections in the Fair Labor Standards Act presumptively extend to all employees. Thus, when an employee is told, "we're going to need you to come in and work on Saturday," the default rule is that those hours will be tracked, extra payment will be made for them, and hours worked over forty in a week (under federal law) will be paid at the overtime rate. There are several so-called "white collar" exceptions to this rule -- one for "professionals" who must undergo significant schooling or training (e.g., doctors and lawyers), one for "executives" with a certain degree of managerial responsibility, and one for "administrative employees" who have discretion to make key decisions for the business. To qualify for those exemptions, an employee must (a) make a minimum salary, and (b) have the type of job duties specified for the exemption in question. The general idea behind the salary requirement is that if an employee may be asked to work increased hours without any corresponding increase in pay, he or she should be making a relatively high amount to begin with.
From 2004 to 2016, the minimum salary was only $23,660. In 2016, the Obama DOL raised the minimum to about $47,000. Just before the rule went into effect, a judge in Texas struck it down, criticizing the process by which it had been adopted (even though the Department of Labor had spent two years working on it and reviewed nearly 300,000 public comments before adopting it).
Now, the Trump DOL has issued a new rule setting the minimum at $35,568. As a matter of policy, this is an improvement, but query whether someone making only $36,000 is paid so well that he or she can be required to work unlimited hours without any increase in pay.
In California, workers are also protected by state wage laws. The minimum salary for overtime exemptions in California is just under $50,000.
Today, Governor Newsom signed a bill that strengthens protection against misclassification of California workers as independent contractors. The bill - AB5 (available here) - will be codified as Labor Code 2750.3, among other amendments, beginning January 1, 2020. The effect of the bill is to expand the use of the so-called "ABC test" or "Dynamex" test for distinguishing an employee from an independent contractor. Under the ABC test, a person providing labor or services for pay (with narrow exceptions) is considered an employee, not an independent contractor, unless the hiring entity proves all of the following:
From the perspective of worker protection, AB5 was a necessary step to keep up with changes caused by smartphone technology. Smartphones and algorithms now allow companies to manage workforces remotely and allow workers to sign in and out of work at irregular, flexible intervals in a way that was not possible when most of the Labor Code was conceived of. That added degree of freedom does not change the fact that so-called "gig workers" are company workforces, and as such, they are meant to be protected by the Labor Code.
AB5 completes a job that the California Supreme Court started in its Dynamex decision, discussed previously in this blog. There, the Court adopted the ABC test for purposes of California's "wage orders," which contain requirements such as minimum wage, overtime, and meal- and rest-break requirements. However, the Dynamex decision did not adopt the ABC test for any other purpose, such as for provisions of the Labor Code not found in the Wage Orders, or for purposes of workers' compensation law. Therefore, a single worker's claim for overtime based on misclassification as an independent contractor would depend on the outcome of the ABC test, while the same worker's claim for unreimbursed business expenses would depend on the outcome of a different test. AB5 resolved these inconsistencies and provided Legislative confirmation of the Supreme Court's adoption of the ABC test. AB5 states that it generally applies retroactively to the maximum extent permitted by law.
AB5 has been strongly opposed by Uber and Lyft, which still classify their workers as independent contractors notwithstanding the Dynamex decision. How these companies, and other gig economy companies that rely on workforces made up of independent contractors, will react to the signing of AB5 remains to be seen.
Today, the California Supreme Court handed a significant victory to employers in the ongoing effort to use individual-only arbitration clauses to eliminate group wage claims. At issue was whether employees could seek to recoup underpaid wages under the California Labor Code's Private Attorneys General Act ("PAGA"). The decision, ZB, N.A. v. Superior Court (S246711), answered that question in the negative. It is available here.
PAGA claims can be brought by plaintiffs as representatives of the state of California to seek penalties for Labor Code violations suffered by groups of aggrieved employees. Unlike class actions, PAGA group claims cannot be eliminated through "individual-only" arbitration agreements. One of the key penalties employees have sought to recover through PAGA is found in Labor Code section 558, which deals with unpaid overtime wages, among other things. That section provides for a "civil penalty" consisting of a small fine for each violation "in addition to an amount sufficient to recover underpaid wages." Whereas most PAGA penalties are split 75/25% with the State, wages recovered under Section 558 are "paid to the affected employee" in full. Until today, employee advocates relied on PAGA and Section 558 to recover underpaid wages for groups of employees in various situations, including where arbitration agreements had eliminated other methods of enforcement.
Today's ruling will end that practice. In a detailed exercise in statutory interpretation, the Court concluded that Section 558's reference to an "amount sufficient to recover underpaid wages" was not part of the "civil penalty" in Section 558, and therefore not something that employees can collect via PAGA. This was a surprise. In the employment law trenches, there had been debate about whether a PAGA claim for underpaid wages under Section 558 could be compelled to arbitration, but it had generally been viewed as clear from the language of Section 558 that such wages were part of the "civil penalty" described in that section. If the Court misunderstood the Legislature's intent, the remedy at this point is an amendment to Section 558.
The most obvious ramification of the Court's decision is that arbitration agreements will be even more effective at preventing enforcement of the wage laws on a group basis. But there are other effects. Previously, PAGA cases could be brought to recover wages when a class action was not an appropriate vehicle for various reasons -- for example, if the numerosity requirement could not be met. In such cases, collecting wages through PAGA fulfilled the purpose of PAGA, which is to deputize citizens to enforce the wage laws on behalf of groups of aggrieved employees when the Labor Commission lacks the resources to do so. As of today, such wages can no longer be recovered through PAGA.
William Jhaveri-Weeks is the founder of The Jhaveri-Weeks Firm, a San Francisco-based civil litigation practice for individuals and organizations.