Answering questions posed by the federal Ninth Circuit Court of Appeals, the California Supreme Court issued unanimous rulings in two cases:  Ward v. United Airlines (here) and Oman v. Delta Airlines (here).  The cases involve airline workers who travel within and without California for a living.  Justice Kruger wrote both opinions.  Justice Liu wrote a concurring opinion in the Oman case, but joined the majority too.

Although these cases involve airlines and their employees, the opinions affect both California-based and out of state employers, who employ workers who work in multiple states and don’t spend a majority of time in any one state. Transportation workers, traveling sales, like that.  Separately – the Court decided an important wage and hour law issue that affects all California employers.  So, consider reading on.  On the bright side, I read all 80-something pages of the opinions and will distill down the rules for you.

There are three main issues decided:  (1) are these multi-state employees entitled to California-compliant wage statements, as required by Labor Code section 226?  (2) do the employers have to pay employees as directed by Labor Code section 204 and (3) – unrelated to the employees’ location and of importance to any California employer  – does the compensation system used by these airlines comply with California’s minimum wage laws?

Wage Statements and Timing

The plaintiffs claimed that their employers did not issue “wage statements” that complied with California Labor Code section 226.  That section prescribes what information has to be provided every pay period with the paycheck.  The plaintiffs in the Oman case also claimed that the airline did not comply with Labor Code section 204, which governs how frequently employees are paid. Most states don’t have these laws.  So, the Court was deciding whether United and Delta had to conform their wage statement and pay timing practices to California law, or at least for which employees they would have to do so.

So, after much analysis, the Court adopted the following rule regarding when employees are covered by Labor Code sections 204 and 226:

We conclude that whether plaintiffs are entitled to California-compliant wage statements depends on whether their principal place of work is in California. For pilots, flight attendants, and other interstate transportation workers who do not perform a majority of their work in any one state, this test is satisfied when California serves as their base of work operations, regardless of their place of residence or whether a collective bargaining agreement governs their pay.

To get there, the Court also had to hold that Wage Order 9’s exemption for collectively bargained employees (unionized) does not apply to section 226 or 204.  These laws are independent of the Wage Orders’ coverage.

The coverage rule, put another way:

For interstate transportation workers and others who do not work more than half the time in any one state, we conclude this principle will be satisfied if the worker performs some work here and is based in California, meaning that California serves as the physical location where the worker presents himself or herself to begin work. * * * *

Applied to section 226, it means that workers are covered if they perform the majority of their work in California; but if they do not perform the majority of their work in any one state, they will be covered if they are based for work purposes in California.

So, employers must provide section 226-compliant wage statements to (1) employees who work in California the majority of the time (2) employees who do not work the majority of their time in any state, but who report to or start work in California.  Same goes for the timing of payment under section 204.

Minimum Wage

You remember the Stoneledge Furniture or Downtown Motors cases, right?  Of course not because you’re not wage and hour nerds.  Well, these cases and others say that in California, one must be paid minimum wage for all hours worked, and that one cannot average out pay to get there.  For example, in the case of Downtown Motors, the company paid auto mechanics a flat fee for actual auto services. Because that flat fee was so high, the employer did not pay additional hourly wages for activities unrelated to the service task (like cleaning, waiting for the next vehicle, organizing tools, etc., or rest breaks, which by law are “paid.”).

Although the employees earned, on average, more than minimum wage, the court of appeal in Downtown Motors held that the employer in effect was “borrowing” wages from the auto service work performed to “pay for” the rest periods and work unrelated to auto service work.  In the Stoneledge Furniture case, the court decided that commissions employees earned for selling could not be used to “pay for” time spent in non-selling activities.  We published a longer article about these matters here.

The Supreme Court here in the Oman case for the first time endorsed this line of cases. But the Court’s reasoning may benefit employers in cases still pending before the high court and in the real world.

Downtown Motors promised to pay workers for their service tasks.  Stoneledge paid sales persons commissions for selling goods.  Both employers then averaged out that pay over total hours worked and claimed they  satisfied their minimum wage per hour obligations. The courts of appeal in both cases held that even if the employees were on average paid more than minimum wage per hour worked, the employers were breaching their own contract with the employees.  How? by using commissions / repair pay to “pay for” work not covered by the contract (non-selling or repair time).  So, the “promise” or “contract” to pay certain amounts for certain work is what governs whether the employer “borrows” from those high wages to pay for unrelated activities.

It is the “borrowing” that is illegal.  However, the Court pointed out that paying employees for time in ways other than hourly would be legal, so long as (1) the  pay applies to the work for which the pay was promised (2)  the pay comes out to at least minimum wage per hour spent on the activities for which the pay was intended.  Get it?  If not, I will explain further.

In the case of Oman, the Court was dealing with employees paid for flight time and non-flight time, including waiting around for the plane to be ready, meetings, waiting for the plane to leave the gate, post-flight activities, etc.  The airlines paid for the combination of flight and non-flight time via a series of compensation formulas. Delta had four formulas that it applied to each route, and paid whatever came out the highest of the four calculations.  The formulas resulted in compensation for all flight and non-flight time in excess of minimum wage.  But the formulas were not expressed in hour-by-hour pay.  So, the plaintiff argued that the airlines were “averaging” the payments for non-flight time, rather than paying an hour-by-hour amount.

The Court said the difference between what the airlines were doing lawfully and what Downtown Motors and Stoneledge were doing unlawfully, is that the airlines promised certain pay for flight time, and certain pay for non-flight time, and that pay exceeded minimum wage.  The fact that sometimes it took more or less hours to obtain the pay, and the fact that different rates applied to different tasks, was irrelevant to the law.   In contrast, in Downtown Motors and Stoneledge, the employers were applying “piece rates” and “commissions” –  wages that are specifically linked to certain tasks –  and averaging that compensation over all hours worked, including hours not spent on those tasks.  They borrowed “piece rate” compensation and applied it to non-piece rate work (like cleaning the shop).

Still don’t get it?  Here’s what the Court said:

the remuneration provided to Delta flight attendants is measured by the “rotation,” a given sequence of flights over a day or a period of days that the attendant will serve on. Compensation for each rotation is calculated according to four different formulas; flight attendants are paid according to whichever formula yields the largest amount for the complete rotation. …. It is undisputed that under this compensation scheme, flight attendants are always paid, on an hourly average, above the minimum wage. Oman contends that the scheme nonetheless violates California’s minimum wage law, principally because one of Delta’s four formulas—the formula that most often determines how much flight attendants will be paid, because it generally yields the greatest compensation—is based solely on flight time and does not factor in the hours flight attendants spend working on the ground before and after flights.

* * * *

The Division of Labor Standards Enforcement (DLSE) and the unanimous Courts of Appeal, . . .  have embraced a more stringent understanding of state law that forbids taking compensation contractually due for one set of hours and spreading it over other, otherwise un- or undercompensated, hours to satisfy the minimum wage—a practice that has often, perhaps misleadingly, been referred to as “wage averaging.” As we will explain, the practice these authorities prohibit might be more accurately characterized as “wage borrowing,” and we employ that phraseology here.

*  *  *  *

State law prohibits borrowing compensation contractually owed for one set of hours or tasks to rectify compensation below the minimum wage for a second set of hours or tasks, regardless of whether the average of paid and unpaid (or underpaid) time exceeds the minimum wage. Even if that practice nominally might be thought to satisfy the requirement to pay at least minimum wage for each hour worked, it does so only at the expense of reneging on the employer’s contractual commitments, in violation of the contract protection provisions of the Labor Code.

*  *  *  *

[W]e summarize the principles this way. The compensation owed employees is a matter determined primarily by contract. Compensation may be calculated on a variety of bases: Although nonexempt employee pay is often by the hour, state law expressly authorizes employers to calculate compensation by the task or piece, by the sale, or by any other convenient standard. (See Lab. Code, § 200, blog. (a) [compensation may be “fixed or ascertained by the standard of time, task, piece, commission basis, or other method of calculation”]

*  *  *  *

Whatever the task or period promised as a basis for compensation, however, an employer must pay no less than the minimum wage for all hours worked. (See Wage Order No. 9, §§ 2(H), 4.) The employer must satisfy this obligation while still keeping any promises it has made to provide particular amounts of compensation for particular tasks or periods of work. (Lab. Code, §§ 221–223.) For all hours worked, employees are entitled to the greater of the (1) amount guaranteed by contract for the specified task or period, or (2) the amount guaranteed by the minimum wage.

Whether a particular compensation scheme complies with these obligations may be thought of as involving two separate inquiries. First, for each task or period covered by the contract, is the employee paid at or above the minimum wage? Second, are there other tasks or periods not covered by the contract, but within the definition of hours worked, for which at least the minimum wage should have been paid?

Two more points –  First, the Court points out that employers must comply with the Labor Code provisions governing piece rate compensation, including specific pay for non-productive time and rest periods.  So, do that.  Second, the Court didn’t touch on it, but this decision does not affect or address the rules applicable to non-exempt salaried workers.

I hope this clears up the Court’s discussion of the minimum wage issue. If not, well, please call a skilled wage and hour lawyer before implementing compensation plans.