When Shakespeare wrote in Henry IV, “Uneasy lies the head that wears a crown,” he could have been describing law firm managing partners. Client development and satisfaction, billable hours, expense control, office leases, hiring and retaining associates and staff, fierce competition, oh, and the practice of law, are just a few of the challenges facing the lawyer who accepts the responsibility of running a law firm or office.

The most diligent managing partner may not have the time or desire to keep abreast of the many laws, regulations, and practices that apply to California businesses, not to mention how such rules are applied in their own office. But California’s wage and hour and other laws fully apply to law firms, even small ones, regardless of whether the firm’s clientele are plaintiffs or defendants. And ignorance is not bliss because it is apparently no longer taboo to sue a law firm. Staff and attorneys alike are asserting wage and hour and other employment law-based claims against law firms just as they would against other employers. So, what you don’t know can hurt you, or at least cost your operation money.

Hiring an administrator or human resources manager is not a guarantee of wage and hour peace. The laws and regulations are too numerous, vague and dynamic to completely avoid mistakes or oversights. It is impossible to identify every potential wage and hour issue that arises in the workplace. But here are some tips that may help the managing partner and his or her designee avoid some of the risks.

First, it is important to classify employees properly. A temporary or part-time worker will not automatically qualify as an “independent contractor” under California law. Despite the fact that many law firms treat lawyers and support staff in certain roles as contractors, such individuals usually do not meet the standards for contractor status, particularly if they work side-by-side with employees doing the same work. If a firm does retain an independent contractor who will be paid at least $600, the firm must register with the Employment Development Department in most cases. Before hiring an individual independent contractor on a “project” basis, consider the tests for independent contractor status. Misclassification may result in penalties for under-withholding taxes, as well as claims for wages, benefits, and associated penalties to which the individual would have been entitled as an employee. One way around this is to hire workers through agencies. In that case, the workers are employees of the agency, and the agency is merely the firm’s vendor.

Law firms also may misclassify employees as exempt from wage and hour laws, such as overtime pay mandates, meal and breaks, etc. The general exemptions applicable in law firms are bona fide executive, administrative and professional employees. There are detailed tests applicable to each one. Secretaries, paralegals, file clerks, receptionists, most office-level IT employees and law clerks will almost never qualify as “exempt.” Lawyers are exempt as “licensed professionals,” provided they are paid a salary of at least twice the minimum wage (currently the equivalent of $31,250 per year). Lawyers paid by the hour are nonexempt as a matter of California law. On the other hand, with the exception of these licensed professionals, paying a salary does not transform an otherwise nonexempt employee into an exempt one.

Nonexempt employees must be paid minimum wage and overtime, among other applicable obligations. The minimum wage in California is presently $7.50, increasing to $8.00 on January 1, 2008. San Francisco has a special minimum wage, currently $9.14 per hour. Some law firms may hire “interns” or “volunteers.” While some students who receive school credit may qualify for unpaid work, this is a narrow exception that must be reviewed in light of the applicable laws and regulations.

California is one of a few states that provides for overtime pay for work over eight hours in a day. That means an employee can work fewer than 40 hours in a week, but still earn overtime for daily work in excess of eight hours. An employee’s making up time on one day to compensate for a shorter work day therefore may result in daily overtime liability unless the employer and employee comply with the “make-up time” statute. It is critical for the employer to designate a workweek and workday; for example, the workday is 12:01 a.m. to 12:00 a.m. and the workweek is Sunday at 12:01 a.m. through Saturday at 12:00 a.m.

Overtime pay is calculated not on the employee’s base rate, but rather on the “regular rate.” Nonexempt, salaried employees’ regular rate is calculated by taking the weekly salary and dividing by 40 hours, not by the total hours worked (which is the federal rule). Extra compensation, including bonuses that are not entirely discretionary as to the amount and the fact of payment, must be included in the regular rate when calculating overtime. Incidentally, it is illegal to prohibit employees from discussing their compensation or working conditions.

Employees must be paid for all “hours worked,” defined in the wage order as the time the employee is subject to the employer’s control. “On-call” employees may be due compensation for some or all of their “waiting” time, depending on the restrictions the employer imposes. Employees also must be compensated when “suffered or permitted” to work. The remedy for unauthorized overtime is usually disciplinary action; refusing to pay for time worked is dangerous. Also, employees who perform work before they arrive at the office or after they leave, such as stopping off to pick up supplies or making deliveries, must be compensated for their time. Finally, employees are due “reporting time” of up to four hours if they are asked to report to work on an unscheduled day, if they report a second time during a work day, or if they are sent home without work on a scheduled day.

The timing and method of pay is also important. Employees must be paid in accordance with Labor Code Section 204, which sets different rules for exempt and nonexempt employees. Direct deposit may not be mandatory, and “pay cards” instead of checks are legally problematic under most circumstances. The employer’s choice of bank, the paycheck and paycheck stub, even a hand-written one, must comply with Labor Code Sections 212 and 226.

Lawful deductions from pay are limited to those listed in Labor Code Section 224: “insurance premiums, hospital or medical dues, or other deductions not amounting to a rebate or deduction from the standard wage … or when a deduction to cover health and welfare or pension plan contributions is expressly authorized by a collective bargaining or wage agreement.” If you overpay an employee, for example via a mistaken direct deposit, involuntary deductions for overpayments may be considered illegal “self help.” Similarly, ordinary breakage – a lost PDA, a dropped laptop – usually will be considered part of the cost of doing business, the responsibility for which may not be transferred to employees. You can fire a lawyer for leaving a laptop on a plane, but you usually cannot make him or her pay for it. And unilaterally deducting such breakage from an employee’s pay is usually illegal.

Exempt employees’ salaries by definition are fixed minimums. Therefore, they may not be reduced because of the quantity or quality of their work. When a salaried, exempt employee misses work, the opportunities to make deductions from the salary are limited and confusing. One safe rule is that an exempt employee need not be paid salary for any full workweek in which they miss work. The salary also may be prorated when an exempt employee takes off an entire day for personal pursuits, or when he or she takes off a full day for illness and time off under a sick pay plan has been exhausted. The California Court of Appeal recently decided that employers may deduct from employees’ vacation or “paid time-off banks” when they take partial days off, at least when the absence is four or more hours. But if you require exempt employees, such as lawyers, to check e-mail or voice mail regularly on days off, they must be paid their full salary for the day. Exempt employees also must receive full pay for days or partial weeks they spend on jury duty or as witnesses.

If these rules are not confusing enough, there are many other rules applicable to deductions from exempt workers’ salaries and time away from work. The Labor Code contains a number of protected leaves as well, for victims of crimes, volunteer firefighters, and school visits, for example. Some of these apply only to larger employers, so it is important to check whether they are applicable to your business. Employees also are free to participate in lawful, off-work activities (moonlighting) without employer interference, with very limited exceptions.

While many of these considerations may seem minor, the consequences of overlooking them can be drastic. The number of considerations is overwhelming; so much so that I’ll have to continue this analysis in my next column.

Managing partners must make the time to audit compliance and ensure their offices’ practices are in keeping with the morass of often-unclear laws and rules governing wage and hour issues in California. The price of any other alternative is far too high.

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