By: Amy B. Messigian

In a major blow to California employers who utilize a monthly commission scheme but pay biweekly or semimonthly salary to their commission sales employees, the California Supreme Court ruled earlier this week in Peabody v. Time Warner Cable, Inc. that a commission payment may be applied only to the pay period in which it is paid for the purposes of determining whether an employee is exempt from overtime.  Employers may not divide the commission payment across multiple pay periods in order to satisfy the minimum compensation threshold for meeting the exemption in any earlier pay period.  California employers who classify their commission sales employees as exempt should immediately take action to ensure compliance with the law.

The plaintiff in the case, Susan Peabody, worked approximately 45 hours per week as a commissioned salesperson for Time Warner Cable.  Peabody received biweekly paychecks, which included her salary for the pay period, as well as commission wages on a monthly basis.  After leaving her employment, she sued for a variety of wage and hour violations.  Peabody alleged that Time Warner Cable had misclassified her as an exempt employee for which it was not required to pay overtime.

In order to meet the commission sales exemption under California law, among other things, an employee must earn more than one and one-half times the minimum wage.  Peabody was paid less than one and one-half times the minimum wage in any pay period in which she did not also receive her commission payment; however, she was paid far in excess of one and one-half times the minimum wage on each pay period in which she also received her commission payment and her total monthly wages exceeded one and one-half times the minimum wage.  Based on the fact that the commission payment was reflective of commissions earned over the course of a month, Time Warner Cable argued that it should be permitted to split the commission payment between the pay periods in the month for the purposes of determining Peabody’s exemption from overtime.

The California Supreme Court rejected this approach holding that commission wages paid in one biweekly pay period cannot be attributed to other pay periods for purposes of meeting the exemption.  Rather, whether the minimum earnings prong of the commission sales exemption is satisfied depends on the amount of wages actually paid in a pay period.  “An employer may not attribute wages paid in one pay period to a prior pay period to cure a shortfall.”  This holding further differentiates that California commissioned sales exemption from the federal exemption, which permits employers to defer paying earned commissions so long as the employee is paid the minimum wage each pay period.

The Peabody ruling greatly impacts the manner in which companies structure their commission plans and payroll for commissioned employees.  Because a commission payment may only be allocated to the period in which it is paid for purposes of meeting the exemption, employers should consider adopting biweekly or semimonthly payroll structures for both salary and commission payments or allocating a greater distribution of employee income to base salary as opposed to commissions in order to meet the minimum salary threshold each pay period.

The ruling also forebodes a new wave of misclassification suits for unpaid overtime in cases such as this where an employee may only meet the exemption part of the time.  Of great concern will be the ability of employers to defend such suits where they have not kept good records of the hours worked by the employee, or their meal or rest breaks, due to the mistaken belief that they were exempt from overtime.  Employers with large numbers of commissioned salespeople should consult employment counsel to perform misclassification auditing and assess the risks of class litigation.


By Jeffrey Landes, Susan Gross Sholinsky, and Nancy L. Gunzenhauser

A hot topic for every summer – but particularly this summer – is the status of unpaid interns. You are probably aware that several wage and hour lawsuits have been brought regarding the employment status of unpaid interns, particularly in the entertainment and publishing industries. The theory behind these cases is that the interns in question don’t fall within the “trainee” exception to the definition of “employee” under the federal Fair Labor Standards Act (“FLSA”), as well as applicable state laws. If the intern does fall within this exception, he or she is not subject to wage and hour laws (such as minimum wage or overtime) and the unpaid internship is thus permissible.

Federal and New York State Factors

According to the U.S. Department of Labor (“DOL”), all six of the following factors must be met if an intern can be exempted from wage and hour laws under the “trainee” exception:

  1. The internship, even though it includes actual operation of the facilities of the employer, is similar to training that would be given in an educational environment. The more an internship program is structured around a classroom or academic experience as opposed to the employer’s actual operations, the more likely the internship will be viewed as an extension of the individual’s educational experience.
  2. The internship experience is for the benefit of the intern. The intern should get more out of the internship than the employer.
  3. The intern does not displace regular employees, but works under the close supervision of existing staff. If an employer uses interns as substitutes for regular workers or to increase its existing workforce during certain time periods, then they are more likely to be deemed employees.
  4. The employer that provides the training derives no immediate advantage from the activities of the intern and on occasion its operations may actually be impeded.
  5. The intern is not necessarily entitled to a job at the conclusion of the internship. The internship should be of a fixed duration, established prior to the outset of the internship, and should not be used as a “long-term job interview” for employment.
  6. The employer and the intern understand that the intern is not entitled to wages for the time spent in the internship. The parties should enter into a written agreement on this point.

In addition, the New York State DOL has a five-factor test for whether an intern is not an employee.  According to the New York State DOL, all five of these factors must be met, in addition to the U.S. DOL’s six factors:

  1. Any clinical training is performed under the supervision and direction of people who are knowledgeable and experienced in the activity. The intern should be supervised by a person in that field, not by an administrator or HR.
  2. The trainees or students do not receive employee benefits. The intern should not be eligible for health care, vacation, or discounted services.
  3. The training is general and qualifies trainees or students to work in any similar business.  It is not designed specifically for a job with the employer that offers the program. The training must be useful, transferable to any employer in the field, and not specific to that employer.
  4. The screening process for the internship program is NOT the same as for employment and does not appear to be for that purpose. The screening only uses criteria relevant for admission to an independent educational program. There should be a separate application and selection process for interns and employees.
  5. Advertisements, postings, or solicitations for the program clearly discuss education or training, rather than employment, although employers may indicate that qualified graduates may be considered for employment. It should be obvious that a job posting is for an internship and not for employment.

How Are the Courts Interpreting These Tests?

Several federal circuit courts of appeal have addressed this issue applying various tests. At least one court has used the “all or nothing” test, whereby all six U.S. DOL factors must be met if the interns will be considered “trainees.” Other courts have followed the “totality of the circumstances” test. These courts hold that the six factors are relevant to help determine whether an individual is a trainee, but are not “hard and fast” requirements. Still other courts have used an “economic reality” test, similar to that used in classifying employees and independent contractors under the FLSA. Yet another court created a “primary beneficiary” test, which asks whether the employer or employee is the primary beneficiary of the intern’s labor.

Courts in the Southern District of New York have generally followed the totality of the circumstances test in determining whether an intern is an employee or a trainee, but the scope of the analysis has differed. Currently there are two cases pending in the Second Circuit for a joint decision as to the proper analysis, among other issues. Even after the Second Circuit rules, the Supreme Court will likely weigh in on this topic. However, the Supreme Court recently denied a certiorari requested by a party to an intern case in the Eleventh Circuit.

Practical Considerations in Establishing a Compliant Unpaid Internship Program

  • Even if an intern meets the test of being a “trainee,” who is not subject to the FLSA, interns in New York City (and perhaps in other jurisdictions to come) are afforded the same rights against employment discrimination as employees, under the applicable fair employment practices laws.
  • When recruiting interns, use different postings, applications, and screening processes than when recruiting employees.
  • When drafting an offer letter, ensure that the intern knows that he or she will not be paid, and is not entitled to a job at the end of the internship.
  • Review your policies and other benefit plans (for example, vacation/sick leave, workers’ compensation) to determine if interns are included or excluded from coverage.
  • Structure the unpaid internship to include shadowing and classroom learning, and if possible, have interns receive school credit. While receiving school credit is not determinative under any of the tests, it is one of the best indicators that the intern is not an employee.

By Nancy L. Gunzenhauser

On March 13, 2014 President Obama issued a memorandum instructing the Department of Labor (“DOL”) to review and revise overtime regulations under the Fair Labor Standards Act (“FLSA”).  Under the FLSA employees are eligible to receive overtime for all hours worked over 40 per week, unless they fall within certain specified exemptions.  The most common of exempt classifications in the retail industry are executive, administrative, and commission sales.

The executive exemption applies to managers and supervisors who direct the work of others and who earn a salary of at least $455 per week. The administrative exemption applies to employees who (i) earn a minimum weekly salary of $455, (ii) perform non-manual work directly related to the employer’s business operations and (iii) have as a primary duty the exercise of discretion and independent judgment with respect to matters of significance. The commissioned sales person exemption applies to employees who receive more than half of their earnings from commissions.

The upcoming changes to overtime regulations will be the first since 2004, when the threshold for the executive exemption was raised from $250 to $455 per week.

While the exact changes the Obama administration has in mind remain unclear, the impact on the retail industry, and indeed nearly all employers, may be be significant because the express purpose of the mandated review is to increase the number of workers eligible for overtime. One likely change will be a further increase to the minimum weekly salary threshold for executive and administrative exemptions. Inasmuch as many, if not most, exempt employees already have salaries of more than $455 per week, the change to the salary threshold alone might not be significant – depending on the new minimum. But, other changes cannot be ruled out.

The DOL has not indicated when it expects to issue the proposed amendments. A comment period will follow before any rule amendments are adopted, however.   Rulemaking may take a year or more. We will be monitoring the process and will alert you here to developments.

In addition, you may wish to download the EBG Wage & Hour app to your smart phone,  where changes to the regulations will also be posted.

By:  Anna A. Cohen and Nancy L. Gunzenhauser

A number of states and localities will require paid sick and bereavement leave, as well as caregiver leave benefits in 2014.

Paid Sick Leave

New York City, Jersey City, New Jersey and Portland, Oregon will require employers, with some exceptions, to provide paid sick leave in 2014.  Portland’s law becomes effective on January 1, 2014, Jersey City’s law becomes effective on January 24, 2014, and New York City’s law becomes effective April 1, 2014.  As we previously reported, these cities join San Francisco, California, Seattle, Washington, the District of California and Connecticut in requiring paid sick leave.

Bereavement Leave

Oregon’s Family Leave Act (OFLA) will require employers to provide bereavement leave, effective January 1, 2014.  The first law of its kind, employers with 25 or more employees will be required to provide eligible employees with two weeks of leave per death of a family member (defined as spouse, same-sex domestic partner, child, parent, parent-in-law, grandparent, grandchild, or the same relations of an employee’s same-sex domestic partner or spouse), up to a maximum of 12 weeks in a 12-month period.  Leave may be taken to make arrangements necessitated by the death, to attend the funeral or memorial service, or to grieve.

Caregiver Leave

Rhode Island will become the third state to permit employees to collect temporary disability benefits for caregiver leave.  California and New Jersey are the only other states that permit employees who are not disabled to collect state sponsored short-term disability. Rhode Island’s Temporary Caregiver Insurance law, effective January 1, 2014, will apply to all employers, regardless of size, and provides employees with up to four weeks of job-protected leave per year to care for a seriously ill child, spouse, domestic partner, parent, parent-in-law or grandparent, or to bond with a newborn child, newly adopted child or new foster-care child.

Bottom line

Employers that already provide leave that is at least as generous as what is required under these new laws will not be required to provide additional paid leave.  Most companies, however, will need to implement or amend existing paid leave and other policies to ensure compliance with the new laws.

By Jennifer Nutter and Amy Messigian

’Twas the night before the holiday party and all through the halls,
Human Resources was stirring, and posting on walls!
The policies were hung on the blackboard with care with the knowledge that 2014 soon would be there!

Like a holiday carol sung every December, a tune repeats this December for California employers as in years past:  review your policies.  In light of the bevy of new laws that take effect on January 1, it is time to conduct a handbook and policy review to ensure compliance as the new laws roll out.

Employers should be mindful of the following key changes, each of which is effective on January 1 unless otherwise noted:

–          Minimum Wage Increases: The minimum wage in California is increasing to $9/hour effective July 1, 2014.  Employers should confirm whether currently exempt employees will continue to meet any minimum compensation requirements once the minimum wage increases (e.g., twice the minimum wage will become $720 a week or $37,440 a year).  Additionally, San Jose and San Francisco have increased the minimum wages in their municipalities to $10.15/hour and $10.74/hour, respectively, each effective January 1, 2014.  Come 2014, employers who fail to pay minimum wages may be subject to liquidated damages to the employee in addition to existing penalties.

–          Background Check Restrictions: Effective January 1, employers will be expressly prohibited from considering prior criminal convictions in employment decisions when the conviction has been judicially dismissed.  Effective July 1, state or local agencies will be prohibited from asking an applicant to disclose information regarding a criminal conviction until after there has been a determination that the applicant meets the minimum job qualifications with certain exceptions.

–          Breaks for Heat Illness Prevention: As we previously reported here, California has expanded an employee’s entitlement to breaks throughout the workday to cover “heat illness recovery periods.”  Under the new law, an employer cannot require a non-exempt employee to work during a recovery period, defined as a “cool down period afforded an employee to prevent heat illness.”  An employee who is not provided with a recovery period will be entitled to an additional hour of pay each workday that the recovery period is not provided.

–          Expanded Protection for Exercising Rights Under Labor Code: Current law protects employees who assert their rights under the Labor Code from discharge and discrimination.  This law has now been expanded to prohibit “retaliation” or other “adverse action” against such employees and to clarify that oral or written complaints regarding owed unpaid wages are protected.  A civil penalty of up to $10,000 per employee per violation has been added to the statutory provisions.

–          New Prohibited Bases of Discrimination: “Military and veteran status” has been added to the list of categories protected from discrimination under the Fair Employment and Housing Act (“FEHA”).  Such status is defined under FEHA as “a member or veteran of the U.S. Armed Forces, U.S. Armed Forces Reserve, the U.S. National Guard, and the California National Guard.”

–          Definition of Sexual Harassment Clarified: New law clarifies that sexual harassment may involve actions unmotivated by sexual desire.

–          San Francisco Caregiver Leave: The Family-Friendly Workplace Ordinance requires that covered employers consider requests for “flexible or predictable working arrangements to assist with care giving responsibilities.” Employees are protected from adverse action on the basis of “caregiver status.” Employers with San Francisco worksites will be required to include a poster on this ordinance in the workplace with other required postings (poster not yet available).

–          Protections for Stalking, Domestic Violence and Sexual Assault Victims: New law extends the protections for victims of domestic violence or sexual assault to victims of stalking as well.  All California employers are prohibited from discharging, discriminating or retaliating against an employee who needs to take leave to appear in court or attend any related legal proceedings.  Employers with 25 or more employees must provide leave for psychological or medical treatment, including safety planning.  The law prohibits discrimination or retaliation against the employee due to his or her status as a victim of domestic violence, sexual assault or stalking and requires that an employer provide reasonable accommodations, which may include the implementation of safety measures.

–          Whistleblower Protections Expanded: Whistleblower protections have been expanded to include reporting alleged violations of local rules or regulations. The law was also expanded to protect employees who disclose, or may disclose, information regarding alleged violations “to a person with authority over the employee or another employee who has authority to investigate, discover or correct the violation.”  The law also prohibits retaliating against the employee based on a belief “the employee disclosed or may disclose information.”

–          Increased Protection of Immigrants: New law prohibits employers from engaging in “unfair immigration-related practices” when an employee asserts rights under the Labor Code and provides a variety of penalties including a private right of action and civil penalties as high as $10,000 per employee per violation for retaliation against the employee.  The law also permits the court to order the suspension or revocation of a business license due to violation of these provisions.

In addition to the above key changes, the following changes should also be noted:

Leave Laws

–          Time Off for Emergency Duty: California has expanded its law providing leave for volunteer firefighters to train for emergency duty.  Now, employers of 50 or more employees must also permit employees to take up to 14 days off to train to perform emergency duty as reserve peace officers, or emergency rescue personnel.

–          Time Off for Crime Victims: California has expanded the rights of certain crime victims to take time off work to appear in any court proceeding in which their rights as a victim are at issue. The law does not apply to all crimes and employees must comply with requirements for requesting leave.

–          Paid Family Leave Benefits Expanded: California is broadening the definition of “family” within the Paid Family Leave (PFL) program effective July 1, 2014, to allow workers to receive partial wage replacement benefits while taking care of siblings, grandparents, grandchildren, and parents-in-law.  As before, the right to receive state PFL benefits is separate from whether an employee has a protected right to take time off.  Importantly, the definition of “family” was not modified in leave statutes such as the California Family Rights Act (CFRA).

Wage and Hour Laws

–          Attorney’s Fees for Bad Faith Wages Claims: This new law authorizes an award of attorney’s fees and costs to an employer who prevails in an action brought for the non-payment of wages, fringe benefits or health and welfare pension fund contributions, only when a trial court finds that the employee brought the court action in bad faith.

–          Labor Commissioner Lien: New law provides the Labor Commissioner with authority to create and record a lien in any county in which an employer’s property may be located in order to satisfy an order, decision or aware that has become final against the employer.

–          Criminal Penalties for Wage Withholding Violations: Employers who fail to remit withholdings from an employee’s wages that were made pursuant to state, local, or federal law may now face criminal penalties in addition to any other liability.

Immigrant Protections

–          Retaliatory Threats to Report Immigration Status: New law permits the suspension or revocation of an employer’s business license for threatening to report or reporting an employee’s suspected or actual citizenship or immigration status, or the suspected or actual citizenship or immigration status of a family member, to a federal, state or local agency because the employee, former employee or prospective employee exercised their rights under the Labor Code, Government Code, or Civil Code.  The law provides a civil penalty up to $10,000 per violation and contains no requirement that the employee exhaust administrative remedies prior to bringing a civil action under a provision of the Code unless the Code explicitly requires exhaustion.  Individuals may also be criminally liable for extortion for such reports or threatened reports.


–          Garment Manufacturer Displays: New law requires that garment manufacturers display their name, address and registration number at the front entrance of a place of business.

As many of these changes impact the language in employee handbooks and other policies, employers should begin the process now of coming into compliance.  We welcome you to consult EBG for further information on any of the above laws and their impact on your business.Cal

By: Anna A. Cohen and Nancy L. Gunzenhauser

It’s that time of year! As the new year rolls in, 13 states are increasing their minimum wage. Unless noted otherwise, all increases to the minimum wage reflected below will become effective on January 1, 2014.

State Current New*
Arizona $7.80 $7.90
California $8.00 $9.00 (effective 7/1/14)
Connecticut $8.25 $8.70
Florida $7.79 $7.93
Missouri $7.25 $7.50
Montana $7.80 $7.90
New Jersey $7.25 $8.25
New York $7.25 $8.00 (effective 12/31/13)
Ohio $7.85 $7.95
Oregon $8.95 $9.10
Rhode Island $7.75 $8.00
Vermont $8.60 $8.73
Washington $9.19 $9.32

Although the Fair Minimum Wage Act of 2013, introduced in March 2013, would raise the federal minimum wage to $10.10 per hour in three annual steps, the current federal minimum wage remains at $7.25 per hour.  Employers in states with minimum wage provisions that differ from the federal law must pay the higher of the two rates.

Employers operating in one of the 13 states increasing minimum wage in 2014 should ensure that their payroll is in compliance.

*Note: some states have also increased the minimum tip credit for eligible employees.

Our colleagues Kara Maciel and Adam Solander have a new Law360 article, “Where ERISA and the Affordable Care Act Collide,” that serves as an important wake-up call on staffing decisions that employers have to face.

Following is an excerpt:

In July 2013, the Obama administration announced a delay of the employer mandate provision of the Affordable Care Act for one year (i.e., the employer mandate). While back in July a one-year delay seemed like an eternity, the reality is that given the way in which most employers will determine whether an employee is classified as full-time, and therefore is eligible for coverage, as a practical matter, in very short order employers may be forced to make staffing decisions that could expose them to liability. This article will examine some of the risks associated with employer staffing decisions and how those risks maybe mitigated.

Download a PDF of the full article here.

By Lisa M. Watanabe

On September 12, 2013, the Consumer Financial Protection Bureau (CFPB) issued a bulletin warning employers that they cannot require their employees to receive wages on payroll cards. The CFPB’s bulletin was issued amid the growing unrest among workers about the high and unexpected fees often associated with payroll cards.  Critics say that the fees may be so high that employees end up making less than the minimum wage.

In recent years, there has been an increasing amount of employers (especially in the retail and food-service industries) who have adopted this method of payment to reduce the costs associated with distributing cash or checks. Rather than receiving their wages through cash or check, employees receive them on a bank card that can be spent like a credit/debit card or used to withdraw cash at a bank or ATM.

Over the past few months, this payment method has been widely reported in the media. In June, a woman filed a class-action lawsuit against the operators of 16 McDonald’s restaurants in northeastern Pennsylvania challenging their use of payroll cards and protesting the fees and costs incurred to access the wages. (Natalie Gunshannon v. Albert/Carol Mueller T-A McDonalds, Case No. 20130710 in the Court of Common Pleas of the State of Pennsylvania, County of Luzerne). Moreover, in July, the New York Attorney General’s office sent letters to several companies requesting documents related to their payroll card programs to ensure compliance with the consumer protection laws.

Employers who use payroll cards should take heed of the CFPB’s bulletin. The bulletin explains the protections that must be afforded to employees and cautions employers that state law may impose additional restrictions on how employers make wages available to their employees (e.g. mandating alternatives to payroll cards or requiring affirmative consent).

The CFPB has authority to enforce the law against anyone who violates it, including employers and the banks that issue the payroll cards. Therefore, employers who use payroll cards should contact their counsel to ensure their program complies with applicable state and federal laws.


In this month’s Take 5 newsletter, I discuss how California is unique for making numerous types of protected leaves of absence available to employees.  All of these options can add up to a lot of protected leave.

Following is from the introduction:

National employers often find it challenging to navigate the employment laws of the various states in which they do business. In most cases, the easiest solution may be to adopt national policies that follow federal law. This process will not work, however, for employers that do business in California, where state protections are often more expansive and provide greater employee rights than their federal law equivalents. This is particularly true in the leave of absence arena. California is unique in that it makes numerous types of protected leaves of absence available to employees. The cumulative impact of administering all of the available leaves in California can be quite burdensome and lead to a perfect storm in which an employee may continue to be on a protected leave of absence for more than one year. Here’s why …

The full issue is here.

By Jennifer Nutter

Until recently, California retail employers could leverage the threat that employees suing them for nonpayment of wages (including sales commissions), fringe benefits, or health and welfare or pension fund contributions would have to pay the employer’s attorneys’ fees in the event that the claim was unsuccessful.  Labor Code Section 218.5 provided that the court “shall” award the “prevailing party” its attorneys’ fees in such cases (assuming a request was made at the beginning of the suit).

It had long been argued by attorneys representing employees in these types of cases that Section 218.5 should be interpreted to mean that a prevailing employer would only be entitled to its fees if the employee’s suit was found to be frivolous, unreasonable, or without foundation – a standard announced in Christiansburg Garment Co. v. EEOC (1978) 434 U.S. 412 in connection with Title VII discrimination claims and later applied to claims brought under California’s Fair Employment and Housing Act (FEHA) as well.  However, both Title VII and FEHA give courts discretion to award a prevailing party its attorneys’ fees, whereas Section 218.5, on its face, made the award unconditional if the suit was successfully defended.

On August 26, 2013, Governor Jerry Brown put an end to the uncertainty by signing SB 462 into law.  The bill amended Section 218.5 to provide that a prevailing employer is only entitled to recover its attorneys’ fees for defending an employee’s lawsuit for nonpayment of wages, fringe benefits, or health and welfare or pension fund contributions, if it can show that the action was brought in “bad faith.”

It remains to be seen how this new standard will be interpreted by the courts, but because the policy considerations of not chilling meritorious suits brought by employees against their employers are the same as in Title VII and FEHA cases, it is likely to be a similarly high bar.