Issues in Employment Law
an interview with Sam McAdam & Mark Grajski of Seyfarth Shaw, LLP
John Ly | University of California, Davis, School of Law
Posted Saturday, May 1, 2004
4 U.C. Davis Bus. L.J. 12 (2004)

Mr. McAdam is a 1996 graduate of McGeorge Law School. He began his career as an associate for the Sacramento law firm of Diepenbrock, Wulff, Plant, and Hannigan where he specialized in employment law. Mr. McAdam then joined Seyfarth Shaw, a national law firm employing some 600 attorneys and considered to be a national leader in providing legal services on labor law. He is currently a partner in their litigation group where he spends a majority of his time advising employers on numerous compliance issues including wage and hour law, traditional labor union matters, and equal employment claims. He also spends time defending such clients in suits brought by their employees.

Mr. Grajski is also a partner and practices labor and employment law with an emphasis in employment discrimination litigation in state and federal court. He has significant appellate experience, and has argued before the United States Court of Appeals, Ninth Circuit. Mr. Grajski also has a background in patent litigation. Before commencing his legal career, Mr. Grajski attained the rank of Captain in the United States Air Force and served as an F-4G fighter aircraft navigator.

Topic 1: Meal & Time Periods

Since 1998, most lawsuits concerning meals and rest periods have been brought as class actions. In 1998, the legislature passed the Eight-Hour-Day Restoration and Workplace Flexibility Act or AB 60. AB 60 took California out of the 40-hour work and into an eight-hour workday where overtime must be paid for any work past eight hours. In contrast, under federal rules, overtime has to be paid only after a 40-hour workweek. This is significant because the employer and the employee both lose flexibility. For example, an employer or employee can't work four ten-hour days without incurring overtime liability. When Governor Davis took office in 1998, we also saw a massive increase in wage and hour litigation. This was one part of the debate that led to the recall of Governor Davis with the main source of the outcry coming from the business community.

The current governor, Arnold Schwarzenegger, sees the increasing litigation as a problem and wants to do something about it. Will any changes happen soon? I believe the answer is no. The Governor has indicated that he is addressing workers' compensation reform first, which is an even larger problem for employers. Even though the Governor is going to clear that off of his docket before taking on the increase in litigation, at some point he will do something about the massive number of class actions on wage and hour matters.

Q: Can you give us a brief synopsis of the law with relation to rest and meal periods?

A: Employees fall under two categories-exempt and non-exempt employees. What those terms mean is that exempt employees have a heightened status with the company. They are the managers, the human resources professionals, the accountants, or the employees with licenses from the states, like attorneys and engineers. This category of workers is exempt from the overtime laws. The non-exempt employees are the rank-and-file employees, the clerks, or the non-managers who have the duty of actually manufacturing or providing the services associated with their respective company. Non-exempt employees must receive a thirty-minute lunch period each day. They also receive two ten-minute breaks roughly in the middle of each four-hour segment of work. These are unpaid breaks and employees can waive them. But with respect to the lunch period, the employer must provide it and ensure that the employee takes it.

Q: What safeguards does the law provide so that an employer does not take advantage of his bargaining power to coerce an employee into waiving his lunch break?

A: This is at the core of these class action lawsuits. Employers need to provide a time card for non-exempt employees. On the time card, it should say that the employee was made aware of the lunch period and he or she took the lunch period. The employee then signs the card under the penalty of perjury. If the employer forces the employee to work through his lunch break, the employer has violated the law. Now, an employer can get a waiver of the lunch period from the employee, but it must be voluntary and it applies only where the employee is working a six-hour shift. A normal employee who works an eight-hour day wouldn't be eligible. There are other minor exceptions, for example, when an employee is the only person working at the facility. In this case, the employee can work on the clock through the lunch period so long as he or she can get some food.

Q: As an employer, is there an incentive to classify nearly all workers as exempt?

A: No. An employer is inviting an even bigger class action lawsuit by misclassifying employees. When an employer misclassifies an employee, he or she faces meal and rest period payments and unpaid overtime. If an employer misclassifies the worker and the employee works past eight hours, then employer faces the overtime payments and all the penalties associated with the overtime, including attorneys' fees. The last thing you want to do is to misclassify.

Q: Is there a list in the California Labor Code that classifies exempt and non-exempt workers?

A: It's not as clear as you would think it would be. There are sixteen wage orders and each wage order applies to a specific industry. Industries such as the agricultural, manufacturing, construction, and professional service provider industries all have distinct wage orders. The wage orders give the rules regarding how to determine who is exempt and non-exempt. The orders do not list what jobs are exempt or non-exempt, but rather they state the test used to determine whether an employee falls into one of the three principle exceptions. The three principle exceptions are managers, administrative personnel, and professionals. The orders also list the rules for the rest periods. As an employer you have to find your industry's corresponding wage order and check the rules. But yes, the absence of a clear list presents a lingering problem for businesses.

Q: The law states that when an employer fails to give his employee the required rest time, the employer must pay the employee one full hour of pay. This is a very strong incentive for employers to comply. What are the reasons for the number of class actions in this area? Did businesses just forget to look at the law?

A: Employers are generally aware of the law. Disgruntled employees are the greatest source of these lawsuits. Many disgruntled employees have an incentive to create a situation where it is their word against their former employer's. Disgruntled employees have such an incentive because an employer not only has to comply with the law, but he has to fully and completely document the meal and rest periods as well. I think there are employers who have not yet caught up with this new and intense litigation field. They might be complying in good faith with the new rules but failing to document their proof.

Q: So the burden of proof is completely with the employer?

A: That is a good observation. If the employer does not document, then whatever the employee says is taken as true unless otherwise contradicted.

Q: It must be quite expensive for employers to document rest and meal periods. What are the financial consequences for employers who face this type of class action, and how significant is the impact on small and medium sized businesses?

A: These lawsuits against large, medium and small business can be fatal. When an employer is fighting over meal and rest periods without documenting correctly, it can be really dangerous.

Q: Is there a statute of limitations for these claims?

A: The meal and rest period statute of limitations has existed for quite a while and usually lasts three years. Under some theories, you can stretch that to four years. There is a one-year statute of limitations for penalties.

Q: Besides being aware of the law, what additional safeguards would you recommend that businesses take to avoid class actions lawsuits?

A: The first step an employer should take is to audit their personnel policy. This would include checking the break room to see if the required posters are on the wall dictating meal and rest periods and other wage and hour laws. Employers may also want to do an internal audit. If they don't have the skills to do that they should hire an attorney.

The next thing that is absolutely critical is to train onsite managers. In order for the handbook to be useful, managers must ensure compliance with the policies. If a manager does not understand that an employee cannot waive his or her lunch period and works that employee through the lunch period, then having all the written policies in the world would not make a difference. In many instances, this is the main problem.

The third step employers should take is to create an environment where employees who have questions or complaints about the way they are being treated can bring those claims forward to a human resources person. By bringing these problems early, the chances that an employee will resort to seeing an attorney about their problems and potentially filing a lawsuit is reduced.

Topic 2: Reimbursement

In two recent unpublished class actions, California Superior Court judges have ruled that Section 2802 of the California Labor Code requires an employer to reimburse its employees for expenses incurred in the course of employment. The employers argued that the word "indemnify" meant only that employers were required to pay for losses incurred by the employee. The courts disagreed and uniformly held that Section 2802 required reimbursement of all types of employee expenses. This broadened the meaning of the code.*

Q: What compelled the lower state courts to broaden the interpretation of Section 2802 of the California Labor Code?

A: The whole concept of Section 2802 and reimbursement is that when you go to work for an employer, the employee does not become the insurer of the conduct and activity while providing the means and tools for how the job is going to get done. The employee is going to be paid a wage, and he or she is going to do their job. Everything else needs to be paid for by the employer. There are compelling policy reasons for this legal concept. The problem with the law, however, is that it does not allow employees to voluntarily agree to pay certain expenses if they choose to incur them during work. The problem can be seen more clearly by looking at the demands on a salesperson. A salesperson has incidental costs associated with his or her attempt to get a deal done. For example, they may have wide discretion to take potential buyers to dinner to "wine and dine them." They may offer clients tickets to a Sacramento Kings game. All of these are expenses under Section 2802 are generally reimbursed to the employee even though the salesperson is making the discretionary calls. This is the general idea behind the law. Most court decisions are employee friendly and tend to ensure that employees are being protected in the work place.

Q: What does "necessary expenses" include? How does a dual use item like a cell phone that an employee uses for both employment and for personal use fit into Section 2802?

A: The employer must set clear guidelines on whether a cell phone is necessary for part of the job. If the employer paid for the phone, then that is a clear indication that the phone is necessary. If the employee is using his own cell phone and ends up making phone calls, then it is without the employer's authority. However, an employer may still be liable for those expenses if the supervisor is aware that the employee uses the cell phone for work. The cell phone is a great example because it's something very modern and current and the courts have not specifically dealt with it yet. The bottom line is that an employer must have a very clear rule that the use of the phone is needed for the job, and if it is, then he or she has to come up with some reasonable compensation program. An employer does not have to pay for the personal phone calls but can give the employee a reasonable credit or allotment for the expense incurred. A similar reimbursement plan is used for car allowances. The IRS has a standard reimbursement rate per mile that is intended to cover all car allowances including gas and repairs. This can all be reimbursed when the employee tells the employer how many miles he has driven.

Q: Would it be fair to say that without a clear statement from the employer concerning a rule, an employer would be liable for all expenses incurred?

A: Decisions in this area are always very fact intensive. The question is whether the employer actually knows or should know that the employee is incurring this expense. Judges will look at the particular circumstances. For example, if the employee is calling the supervisor on the road for directions, the supervisor knows the cell phone is being used.

Q: What are the consequences of the courts broadening the interpretation of "indemnify" for employers in terms of damages?

A: You have to look at the three-year statute of limitations period for a Section 2802 claim. This problem is more difficult for the employee because the employee has to document all of the expenses incurred. If the employee didn't keep contemporaneous records, then a labor commissioner or a court will be less inclined to credit the employee with a recovery. There are also penalties for failing to reimburse employees and there are attorney fees. The damages would accumulate per employee, and would include reimbursements that can be documented, penalties, and attorney's fees.

Q: How do Section 2802 claims affect medium and small businesses?

A: Section 2802 claims may not be fatal to small and medium businesses since it is harder for employees to accumulate the amount of expenses, such as cell phone and mileage claims, without the employer knowing that it is taking place. These types of claims can be much more attractive to a plaintiff's attorney if the defendant is a large company that has forty to fifty thousand employees where the reimbursement can be 100 or 200 dollars a year for a pager. Then, suddenly, a plaintiff's attorney has a more attractive claim spanning many employees. But if the attorney merely has five to ten employees, then it bringing suit is not attractive given the contingency fee basis on which he or she is customarily paid.

Q: What steps can businesses take to avoid costly litigation over reimbursement costs necessarily incurred in the discharge of their employee's duties?

A: With Section 2802 claims, the job of preventing lawsuits is more in the hands of the supervisor. Like the meal and rest period, employers still need the right policies but it is up to the supervisor to document who has cell phones, who has pagers, and who is accessing the company's system from home. It is the supervisor's job to determine if there is a system to reimburse employees for mileage, postage, or necessary business expenses. They just need effective protocols with their employees.

Topic 3: Off the Clock

Class actions involving "off-the-clock" work remain prevalent in many states. Many of these lawsuits allege that properly classified non-exempt employees simply have too much work to do in a 40-hour week. Instead of receiving overtime, the non-exempt employees resorted to working "off-the-clock" in order to accomplish required tasks.

Q: What is "off-the-clock" work and what is the status of the law regarding it?

A: Again, the distinction between exempt and non-exempt employees is especially relevant. Exempt employees are paid for the value of the work that they do. As a supervisor of an exempt employee, you can work that person all day long or just five minutes. All that matters is that the job gets done. The non-exempt employee gets paid a salary not for the time he or she works, but the job that he or she gets done. Unlike exempt employees, non-exempt employees need to be paid for every minute they work. The clock needs to be running. "Off-the-clock" means they are working and not being paid. In the classic manufacturing setting where non-exempt workers actually punch a time card, "off-the-clock" employees finish the day, punch out, and then a supervisor commands them to finish a task such as cleaning up. This is an egregious violation of the wage and hour laws.

Unlike meal and rest periods and 2802 claims where innocent mistakes can be made, "off-the-clock" violations are so well in-grained in our culture that an employer knows when it has violated the law. Violating the law is never warranted by the circumstances. One can understand that an employee might want to skip a meal period to get a certain job done with the innocent consent of the employer. But there is never a justification for working someone "off-the-clock." The employer knows better. I do not see many off-the-clock suits because if employer is accused of it, then there is no real gray area and that case usually settles. Fair minded and good employers that might be sued for meal and rest period incidents will generally not be sued for off-the-clock violations.

* Mark Grajski, Wage and Hour Materials (2002) (on file with the author)