Wage and hour laws applicable to California employers are complex and ever changing. We briefly summarize below some of the various rules applicable to private sector, non-union employers and explain why wage-hour audits are critical.

Sources of Law

California employers must know the requirements of the federal Fair Labor Standards Act, the California Labor Code, the California Industrial Welfare Commission wage orders, and local rules. Employers also should monitor how the California Division of Labor Standards Enforcement and California courts interpret these laws.

Employee Classifications

Employee classifications drive employer wage-hour obligations. California employees are entitled to be paid on a regular basis, receive accurate pay stubs, and be reimbursed for certain work-related expenses, among other things.

Often, organizations seek to retain “independent contractors,” in part to avoid these obligations. However, workers rarely qualify as independent contractors. In California, employee status is presumed, unless workers meet strict criteria, either under the Dynamex “ABC” test, or the common law “Borello” test. The intent of the parties is irrelevant.

Similarly, California law narrowly defines when individuals may be considered volunteers or unpaid interns. In some cases, employers also may have legal responsibilities to employees who work for other legal entities, such as temporary staffing agencies.

Certain wage-hour hour laws, such as those requiring rest/meal breaks and overtime, only apply to “non-exempt” employees. For that reason, employers obviously prefer to classify employees as “exempt.” However, both federal and state law presume employees to be non-exempt, unless they meet certain strict salary and duty requirements.

Employee misclassification can result in significant liability, including under California’s Private Attorneys General Act.

Paying Employees for Time Worked

Exempt employees are paid for the work they do, not the hours they work. Their salary generally is fixed, and may not vary based on the quantity or quality of the work they perform.

By contrast, employers must pay non-exempt employees on an hourly basis for all time worked. Additional rules apply to piece-rate or commission-based wages. Determining what counts as “time worked” is not always simple. These employees may be entitled to on-call pay, reporting pay, split shift pay, and travel time. They also may not work “off-the-clock,” that is, without reporting their time, and are entitled to pay for time spent performing mandatory activities, such as donning and doffing safety equipment, conducting bag checks, and locking up.

Non-exempt employees who work more than a prescribed number of hours are entitled to overtime wages based on the employee’s “regular rate of pay.” If employees receive multiple rates of pay during a workweek, or additional pay, such as bonuses, calculating the regular rate of pay may be challenging. “Non-discretionary” bonuses are included in the regular rate calculation, and “discretionary” bonuses are not. But “discretionary” does not mean simply that the amount of the bonus initially is unknown. The analysis is far more complex.

Employers must comply with various requirements regarding the timing and manner of wage payments, including an employee’s final paycheck. If an employee quits with at least 72 hours’ notice, they are entitled to final pay on their last day worked. If an employer terminates an employee, final pay is due at the time of termination.

In addition, federal and state equal pay laws prohibit employers from paying employees less than employees of a different sex, race, or ethnicity for substantially similar work. The employer always bears the burden of proving its pay practices are fair.

Paying Employees Not to Work

California employers must provide non-exempt employees with paid rest breaks, during which they must be relieved of all duties. Rest breaks must be provided within prescribed timeframes, and employees must be free the leave the workplace. When an employer prevents an employee from taking their rest breaks, or does not fully relieve the employee of all duties during a break, the employee is entitled to additional pay.

In 2014, California enacted the “Healthy Workplace, Healthy Families Act” sick leave law, which requires all employees to receive paid sick leave to use in certain circumstances. Employers are required to track sick leave accrual and usage. Some local ordinances impose additional sick leave obligations, making compliance even more complex. Additionally, California employers must allow employees to take unpaid leave for a variety of reasons, including caring for ill or injured family members, voting, attending jury duty, performing military service, and attending school activities.

Other Wage-Hour Issues

California wage-hour laws address a variety of other issues. Certain rules apply when employees request to work alternate work schedules. Employers must know when they lawfully can deduct amounts from an employee’s wages (e.g., income taxes—yes; required uniforms—no) and to reimburse teleworkers for related expenses.

Federal and state law impose a number of requirements related to employee notices and posters. Employers also must comply with record retention requirements and laws that limit or allow access to certain information about employees.

The Value of Wage-Hour Audits

Even the savviest employers make mistakes, and they can be costly. In 2019, a group of security guards working for G4S Secure Solutions settled their class action claims for non-compliant rest and meal breaks for $130 million. (Yes, that’s $130,000,000).

Wage-hour audits reveal vulnerabilities so employers can fix them before facing expensive litigation. Although audits may not provide an immediate return on investment, they are valuable insurance for employers, particularly when employers generally cannot purchase insurance to cover wage-hour claims.