Boy, did the San Francisco Chronicle get this one wrong. Some of you may know that the person who writes the headline is usually not the person who wrote the article, but check this out: “State’s high court ruling favors retailers in workers’ comp case.”

Though part of the Workers’ Compensation Act did play a role in the decision, this was not a workers’ comp case from the outset, nor was that really the main issue. The spokespeople for the two sides are also off point:

The court expressly
repudiated the 2003 appellate decision in Thursday’s ruling, an action
that relieved Diane Kimberlin, lawyer for the California Grocers
Association.

The appellate ruling, and arguments by the plaintiff in the current
case, “endangered the use of profit-based bonus compensation systems,”
Kimberlin said.

Brooks disagreed, saying employers managed to preserve bonus systems
after the 2003 appellate ruling by calculating net revenue without
including workers’ compensation costs or other illegal factors.

Plans like the one at Ralphs, he said, “have been used to pressure
employees not to make workers’ compensation claims and to seek
treatment outside the workers’ compensation system.

I didn’t read the original complaint, but if the claim is that this system is discouraging the filing of workers’ compensation claims, the remedy lies in a different kind of claim. Here the issue related to permissible deductions, not coercion.

This is a fairly significant wage & hour opinion. 

The kernel of this opinion is captured in this sentence:

[A]n employer [does not] violate[] California wage-protection laws by providing, as Ralphs did, supplementary compensation designed to reward employees, over and above their regular wages, if and when their collective efforts produced a positive financial result for the store where they worked.

(Slip. Op. 3.) (Emphasis added.)

So, what does this mean? Essentially, because the bonus plan references a formula contingent on an external event, and the expectations with respect to that pay was determined by that plan. (Slip. Op. 10.)  Significant to the majority was that

no employee was offered or promised a specified bonus or commission that was based upon, and immediately measurable by, his or her individual sales or managerial efforts, but was then subject to deductions to cover employer costs.  Instead, under the ICP, all eligible employees’ supplementary incentive compensation was equally and collectively premised, at the outset, on store profits, a factor that necessarily considers the employer’s expenses as well as its income.

(Slip. Op. at 21.)  I’m not being tongue in cheek when I say I think this is a distinction without a difference.  Either way you slice it, the employee gets less and the store gets more–or at least loses less.  It’s easier to understand if the difference is based on expectations, whether or not it stems from individual or collective losses, whether or not the income and expenses are considered, which the Court seems to want to head towards at 22-24. 

For better or worse, that’s what we’ve got.  Though there is dicta that goes further, this opinion appears only to allow the kind of plan set out, with some kind of attenuation between the employee’s own acts and the calculation of the bonus.  As such, it does not overrule Kerr’s Catering and its progeny.

The dissent’s deliberately wide citation to Labor Code 3751 would seem to create a claim for failing to keep wages at the same percentage of a company’s gross revenues, because it would "indirectly" be passing "part" of their workers’ compensation costs on to the employees. (Slip. Dis. 1.) The statute does not intend to create accounting micromanagement.

In some sense, the employee always carries the burden of losses, to paraphrase the dissent (Slip. Dis. 7).  The deduction statute references deductions like taxes, etc. that come out of the prior wage.

Will the Legislature act on this? I’ll see.

UPDATE: Here’s Sheppard Mullin’s take:

Because compensation under the Plan was paid in addition to employees’ regular wages, which were certain and not subject to unlawful deductions, the Court concluded that the Plan appeared to be a lawful incentive program, rather than a plan designed to unlawfully pass along the costs of Ralphs’ business to its employees.

Though they point out that the opinion limits that a little:

Under Ralphs’ Plan, by contrast, the basic measure of compensation is the overall profitability of the enterprise, not an employee’s personal fforts. "All eligible employees’ supplementary incentive compensation was equally and collectively premised, at the outset, on store profits, a factor that necessarily considers the employer’s expenses as well as its income." Accordingly, Ralphs did not retain or recapture anything that was promised to employees, because eligible employees were never promised anything under the Plan other than their share of their store’s profit, which by its nature takes into account the listed
expenses.

I think that’s the essence of this opinion–and it’s a little more narrow than saying you can do what you want with bonus plans.  I won’t pretend that I understand how that difference does any good for anyone, but there it is nonetheless.

More to follow…

UPDATE 1: 7-0. Not many people saw that coming, even if you got the result right. I was way off. I guess I’ll go back to predicting sports outcomes.

UPDATE 2: Essentially, the overtime premium analogy argument won the court over. It was a good argument. I had thought that the use of the term “pay” instead of “wage” was a hook, but I fully recognized that the definition in LC 200 left it open. I’m surprised by this result not because it’s “wrongly decided,” but because I had different estimations of the leanings of some of the justices. The decision was 7-0 and we’re not going to see a bill changing this anytime soon. This is the law now.

Everyone interested in the Great 226.7 Debate should read this post at the Wage Law blog. I particularly like the compilation of various predictions.

Just to expand on what I wrote below, I spend more time reseraching for this blog on legislative issues, talking to people in Sacramento, and developing stories on bills than I do on reading cases. Having done that, I’ve come to chuckle every time I hear a judge trying to divine profound meaning from a single word choice. There simply is not that much care put into one word, and, to be sure, each bill is the work of a number of legislators, staffers, and clerks. Absent an express statement of intent that is in some bills, I think many situations are open to more than one rational interpretation.

There are others out there that are far more qualified to guess, but I would like to think that my prediction was based on what I read about the oral arguments, and the political and legal pedigrees of the various justices.

Maybe I’ve grown a pair of employer shaded glasses over the years, but it’s not that I don’t see the plausability of the other side’s position. If you want to be really cynical about it, don’t strong pro-worker laws give people like me work?

About the oral arguments at law.com and Kimberley’s. (The latter is much better.)

What’s funny is that apparently no one has broached the subject that the Legislature is not nearly as careful and precise in drafting its bills as we pretend.  Ultimately, there is not going to be some Holmesesque flourish of legal brilliance that resolves the issue. 

Most likely, a divided Supreme Court rules that it is a penalty.

As of today, there are five cases pending in the Supreme Court with the issue of the penalty/wage distinction in Labor Code section 226.7.  The lead case is Murphy v. Kenneth Cole Productions,  Supreme Court Case No. S140308.  The others are on hold pending the resolution of the lead case.

To summarize:

• S140303 Murphy v. Kenneth Cole Productions, Inc.
  The First District, Division 1, (San Francisco) justices Marchiano, Swager, and Marguiles, held that section 226.7 imposes penalties. Though this court refers to the legislative history, the touchstone of the decision is that, because employer lack discretion to prohibit meal and rest periods [Note: That's not entirely correct, is it?] that it is not compensation.

• S141278 National Steel & Shipbuilding v. Sup. Ct. (Godinez).
  The Fourth District, Division 1 (San Diego), justices McIntyre and McConnell, with justice Irion in dissent held that section 226.7 is a wage (and a penalty).  This court held that while the legislature hinted at this being a penalty, there are other factors that indicate this is a wage.  First, it is self-executing, as opposed to penalties, which are not vested until enforced.  Looking at the over-arching statutory "scheme" that section 226.7 is a part of, the court found that this is a statutory remedy that is not a penalty, because section 558 is, and it’s unlikely there would be two penalties for one violation.  (And in doing so rejects the DLSE’s interpretation that section 558 does not apply to rest and meal period violations.) Furthermore, the court said, the fact that the Legislature did not explicitly call the section 226.7 remedy a penalty suggests that they didn’t intend the one-year statute to apply.

• S141711 Mills v. Sup. Ct. (Bed, Bath & Beyond).
  The Second District, Division 5 (LA), Justices Armstrong, Turner, and R. Mosk, held that section 226.7 imposes a penalty on the employer.  This court held that the section was ambiguous on its face because the use of the word "pay" was enough to cloud the issue.  The court goes on to rely on the legislative history and the incongruity of section 226.7′s language with other uses of wages to reject the wage thesis. The fact that the penalty isn’t large enough to deter the action [?!] and the federal Tomlinson opinion were rejected.

• S142600 Chalecki v. Sup. Ct. (State Farm).
  No opinion was issued in this case.  The writ petition was denied in the Court of Appeal, but review was granted in the Supreme Court.

• S144949 Banda v. Richard Bagdasarian, Inc.
  In an unpublished opinion, the Fourth District, Division 2 (Riverside), Justices McKinster, Richli, and Gaut held that section 226.7 is a penalty. This court also relied heavily on the legislative history, but did not engage in as deep of an analysis as others, and said that they were going with the majority of judges.  Correctly, I think, they found that the legislative history isn’t that revealing, other than the assembly referred to it as a "penalty."  [Note: can the Floor Analyst be deemed to be an expert on wage and hour law? Need she/he be so?]  Ultimately, this court looked at the rationale for the imposing the penalty, and found that it doesn’t bear any relationship to the detriment an employee might suffer.

Remember, under California stare decisis rules, trial courts are at liberty to follow the reasoning of any of the published opinions.  At this point, pursuant to CRC 8.1105(d), none of these are live, published opinions, however.  That being the case, there’s not much to guide trial court judges at this point. (The DLSE opinion is still live, however.  Under the APA, though, quasi-judicial opinions are the lowest on the totem-pole.  The proposed regs would have been better, quasi-legislative meat.)

Despite the fact that the majority of courts and judges have held (almost dismissively) that section 226.7 creates a penalty, the arguments in National Steel are not trivial, and do not stand thoroughly refuted in other Court of Appeal opinions.  This could make for an interesting result from the Supreme Court.

The federal courts have also issued two new opinions on this matter. 

• Corder v. Houston’s Restaurants, Inc., 424 F.Supp.3d 1205 (C.D.Cal., 2006)
  Judge Carney relying on Mills and, specifically Justice Mosk’s concurrence holding that because employers have no discretion to deny rest breaks and meal periods, and, furthermore, because the remedy does not replace the wages that would still be owed if the employee did work through those breaks, the payment is a penalty.  [Note: This is along the lines of overtime, (i.e., the Tomlinson rationale) another analogy not strongly enough disposed of in other opinions.]
• Pulido v. Coca-Cola Enterprises, Inc., 2006 WL 1699328 (Unpublished).  Judge Phillips held that section 226.7 institutes a penalty. Central to this court’s holding was that "It is scarcely logical to classify the statutory damages as a wage when a court need not examine the actual amount of time worked by the employee."  Otherwise, this opinion doesn’t break much new ground, but hashes over the other cases well.

At the end of the day, many of the courts were at least partially persuaded by the DLSE’s quasi-judicial opinion holding that section 226.7 calls for penalties.  I have not had the same luck using that authority in trial courts, and I agree with the National Steel Court that the DLSE’s opinion isn’t binding on the courts, but their expertise (of course, this was a politically-motivated decision pushed by the Schwarzenegger administration upon their arrival) carries weight.

No one can say for sure what the Supreme Court will do with this.  My sense is that they probably will agree with the Kenneth Cole court and find that 226.7 is a penalty, but I wouldn’t exactly bet on that until some force is applied to the arguments that still make some sense, as advanced by the National Steel court and the old Tomlinson court.  There may or may not be a deep, pervasive authority or framework that overcomes these rationales with more than a mere denial.

Furthermore, some of the arguments on the pro-penalty side are based on incorrect assumptions, which have been recited by subsequent courts.  Starting with Murphy, you can trace a line of cases relying on the theory that employers lack discretion to keep employees from taking rest and meal breaks.  There are, in fact, conditions where employers can ask for on-duty meal periods (which are then compensated, adding yet another wrinkle).  Furthermore, rest periods are paid.  Therefore, discretionary or not, there is some weight to the pro-premium argument.

I will look forward to reading the voluminous briefing filed on this case by the parties and and the amici curiae to see if they’ve found it.  Richard Simmons (not that one), the author of the Wage & Hour Manual For California Employers has signed on as counsel for several amici curiae.  He is an expert, even if he can be somewhat shrill from time to time, and I look forward to reading his papers.

As of now, I am skeptical of the Supreme Court’s ability to be expert in every field of law.  That being the case, I expect them to rely more heavily on the legislative history and "Mosk" rationale, and the fact that only two out of twelve Court of Appeal judges and one out of three federal judges have found the pro-premium side persuasive than the arcane origins of wage premia. 

As for me? I don’t think the statute is ambiguous.  I think it calls for a penalty, using the rate of pay as a measure only.

UPDATE: Interesting tid-bit.  The IRS calls these wages.

UPDATE 2: Thanks to Robert Tollen and his secretary Kathy at Seyfarth Shaw for sending me copies of their briefing in the Kenneth Cole matter.  I will take a look at them and tell you what I think.  So far, they’re quite good.

UPDATE 3: I this the argument that kills the OT analogy?

Suppose, however, that one day an employer provides an employee no breaks, but allows the employee to go home an hour earlier, and so the employee engages in no extra labor. * * *  Suppose, conversely, an employee who is denied a break becomes ill or suffers an injury as a result.  An hour of pay would not compensate for those damages.

Ans. Brief of Opp. Pty. at 9 (Aug. 21, 2006).  Perhaps.  It all depends on whether we accept those rare cases as logically eliminating the possibility of a legislative judgment on the amount of reward. (The second argument is slightly undermined by the presence of workers’ compensation.)  Despite that, I think this clearly shows how it is different from OT in its essence, if not in its usual effect.

    This week, in Konig v.
U-Haul Co. of Cal., the Second District issued a ruling that held that an
employment contract requiring employees to waive their rights to class or
representative actions in arbitrations with the employer was enforceable. U-Haul, the employer, required employees to
sign an arbitration agreement and a waiver of “any right to join or consolidate
claims in arbitration with others or to make claims in arbitration as a
representative or as a member of a class or in a private attorney general
capacity” unless U-Haul agreed to the procedure. An employee bringing a wage and hour claim
against U-Haul sought to have the waiver declared unconscionable. 

    Applying Discover Bank,
the Second District noted that, while contractual class-action waivers are
unconscionable when they apply to claims that have “predictably . . . small
amounts of damages,” wage and hour claims against an employer, such as the one
disputed in Konig, are not predictably small. Therefore, the Court reasoned, a class-action waiver was not
substantially unconscionable under the standard outlined in Discover Bank. 

    This case is sure to generate a lot of comment, including
some recommendations to employers that they begin adding representative claim and
class-action waivers to their employment contracts. However, this
opinion will not be the last word on the issue, and I expect more changes to
the law in this area soon. Because
the California Supreme Court granted a petition to review an opt-in employment
arbitration agreement with a similar class-action waiver in April, there will likely be changes to the standard announced in Konig.

The Fifth District today ruled on an important aspect of California Wage & Hour law, namely: vacation wage pay.

Holding that the Sequeria court improperly relied on DLSE regulations not promulgated according to the requirements of the California Administrative Procedures Act. Essentially, the Church court smacked down the DLSE for attempting to interpret portions of the Code of Civil Procedure. 

In sum, reasoning that an employee’s right to his vacation as wages does not become ripe for suit until his termination (per Labor Code 227.3), this Court held that there is no "look-back" cutoff period for the payment of vacation wages. In other words, earning or accruing your vacation does not begin the statute of limitations period, because there is no requirement that you use it or be paid for it then.

This ruling doesn’t address the law of accrual, other than to say it is not disturbing Suastez.

This opinion makes a lot of sense, frankly.  I’m sure we’ll see some shock-and-awe briefing from the big boys on this, but it doesn’t change my advice much.

A sound policy remains to cash out vacation at regular intervals, pursuant to a written policy, and encourage employees to take vacations to increase their productivity and minimize turnover.  Now you have a cash-management reason to do it too.

The Court of Appeal held that unearned commissions were not wages, and, therefore were recoverable subject to a written agreement that did not reduce the base rate of pay.

While not earth-shattering, this opinion provides some additional color to Section 34 of the DLSE Enforcement Policies Manual.

I spent the morning reviewing the case file in the Dunbar matter.  I looked at both side’s briefing, much of the documentary evidence sumbitted in support (in total it approaches 1000 pages–I looked at key pieces), the trial court’s order, and took a new look at the Court of Appeal’s opinion in light of that.

I was impressed by the quality of the Defendant’s work.  They were thorough, to put it lightly.  They dissected the managers’ job duties and clearly showed how they varied from place to place.  They also blew some pretty large holes in the Plaintiff’s categorization of the job duties. 

In sum, the Defendants were able to frame the issue their way, and took the judge with them.  Having said all of that, I personally have used just about every argument they tried (admittedly, without nearly as much support in the papers) and had my opposition overruled.  I don’t think there is anything about this case that changed the law.

Sav-On was, and I believe always has been, about trial court discretion.  To the extent that judges saw it as merely a "pro-certification" decision, there is a chance that Dunbar will cool that off, and reassert the narrower nature of it.  Anyway, we’ll see what subsequent events hold in this case.

If any of my readers out there see a difference between this and other recent class-action certification cases, please let me know. It’s quite possible I missed it.

There is an interesting back and forth in the comments section over at Wage Law Blog on the recently published Dunbar case.

I had always read Sav-On to be a pro-discretion of the trial court case more than simply a pro-certification case. This opinion seems to bear that out. Otherwise, it’s not (yet) earth shattering. Despite that, in my experience, judges have seen Sav-On simply as pro-certification.

Anyway, here comes my trademarked reserve: Sav-On is a supreme court case, so this one still has to stand up in that forum. What’s more, one case doesn’t make a trend. Stand by. In the meantime, don’t assume this means anything.

P.S. Check out Sheppard Mullin’s write up, taking a victory lap for instigating this “trend,” even though Akin Gump was the Appellee’s counsel. (Apparently, they filed a request for publication.)