Episode 14: Employee Misclassification

Welcome to the Workplace, a podcast by Cal Chamber. I'm Erica Frank, Cal Chamber Executive Vice President and General Counsel. Joining me on the podcast today is Jennifer Shah of the Shah Law Group. On this episode, we are talking about a common employment law issue, the misclassification of workers. Welcome, Jennifer.

Thank you. Great to be here as always.

Oh, it's lovely to have you back again. So misclassification of workers, hot hot issue.

Hot hot issue. And so much going on and so many missed opportunities, I guess, is what I want to say for employers to really understand what's going on.

Okay, so let's frame the issue a little bit, because when we hear about misclassifications, there can be misclassifying a worker as an independent contractor. But today we're talking about misclassifying a worker as a salary employee or someone who's not paid on an hourly basis. Right.

And we have to be really clear about that. Right. Because the word for that is.

So you can have a salaried person who is non exempt. Because to be exempt in California, you have to meet two tests, right? A salary test and a duties test. And a lot of employers, their eyes roll back at this point. Right, right. But I try to tell them, look, this is like a math equation. First of all, they've gotta meet the salary test. And there are a few exceptions, like doctors can be paid by the hour.

Right.

But most of the time it's this fixed salary. And what the law says is it's not subject to variation based on the qu or the quality of work. That's important because a lot of clients will ask me, well, Jen, I know the salary's about 50,000, two times the state's minimum wage, times 2,080 hours. Right. Because that's for full time employment.

Right.

But I pay commission. Can I include commissions or I give bonuses? No, they gotta make two times the state's minimum wage for full time employment and they have to meet one of the duty tests to be exempt. Now, everybody wants their employees to be exempt because why?

That's right. And many employees want to be exempt. Why? Because they don't have to clock in and out. They could take a longer lunch. They can come and go as they please and they're still getting the same amount of pay.

Exactly.

So in California, the law presumes that every individual who works for you is an employee. Right. And we have this, I think, fictitious notion that we have to classify employees as exempt because either they have manager or supervisor in their title or because they worked for us for a long time. They should now be exempt. Are those true?

No. And it's very important for employers to first of all know, just as you said, the law presumes employees to actually be non exempt. So it is always the employer's burden to show that an employee is exempt. And let's define that for a second. Yes, exempt means exempt from all of those wage hour laws that we freak out about. Right. Rest breaks, meal periods, overtime, on call, reporting time, pay, callback pay, all of that does not apply when you have an exempt employee. So many employers say, okay, then I want everybody to be exempt. But of course, the presumption is that they're non exempt and you have to show that they meet that salary test and that duties test.

Okay? So taking a step back, is there any harm for an employer to have all of their employees classified as non exempt or hourly employees?

No. And that's why I love what you just raised, because this comes up a lot. For example, let's say you and I are both exempt. We have the same job, but I'm on fmla, CFRA leave, and I can only work half time. The employer can reclassify me as a non exempt employee without affecting your status. So just because I was exempt or I met the standard or the qualifications for exempt doesn't mean I get to be exempt forever. And many employers, when all this started about 10 years ago about assistant managers.

Yes.

You know, you go to Starbucks and you're waited on by your barista is actually the assistant manager, they actually are non exempt. Right. And there have been a ton of class actions and POGA claims based on that. So a lot of employers have said, forget it, I'm making them all non exempt. Even if they make enough that they would have met the salary basis test and they have those high level discretionary duties that are required for that exempt status, they decide, I don't want to take a risk, everybody's non exempt.

So, Jennifer, under California law, what are the three main exemptions under the wage order?

So we call those the white collar exemptions, and those are the professional, the administrative, and the executive.

Okay. And each three have different duty tests, if you will.

Right. So let's just start with executive, because that one's kind of easy.

Yes.

You have to supervise two or more full time employees. And supervise means hiring, firing, performance management, workflow, giving performance evaluations. And of course, for all of these exemptions, you have to spend more than 50% of your time doing those tasks. So you and I, you might have made coffee this morning. I cleaned up Our microwave, in our kitchen at the office. I made a few photocopies. It's not that the person has to spend 100% of their time on those exempt duties, but they have to spend more than half of their time.

Okay, so I like how we've talked with the executive exemption, because that really does bring into play the working managers or the scenario that you just raised at Starbucks. Because I can see employers saying, well, yes, this person in their job description does require. Require that they hire, that they fire, that they schedule. But why are employers still getting into trouble by the courts and in litigation where they're saying, so sorry, they are doing these things, but they're still not classified correctly and should have been hourly or non exempt?

So there's two reasons why. The first reason is those duties, those management supervisor duties take about 20% of their time. So how are they spending 80% of their time? Waiting on customers, waiting on guests, doing the same work as the hourly employee. The other thing that happens, of course, is that when it's close, when it's a close call and you start counting the time somebody called in sick, so the manager covers for that person pretty soon in that work week. Right. Because it's a work week by work week analysis. In that work week, that person didn't meet the more than 50% test.

So I could see how it's really tricky.

Well, that's the easiest exemption.

Yeah, yeah.

So the administrative exemption people always get confused about because that's a person who's actually doesn't have to supervise anybody, but they have to have a lot of independence and the exercise of discretion. For example, they run a department. They run the marketing department. They're in quality control. They do facilities. Right?

Yeah.

So they don't manage anybody or supervise anybody, but they run a department. It's not just they have an important job or we pay them a lot of money, they have to work a lot of hours. Those are not the requirements. And then, of course, the professional exemption has a couple of different parts, right?

Yes.

They might be licensed, like an attorney or an architect or a dentist. They might be a computer professional. They have to be paid a lot more money. They also might be a creative professional, like a reporter or somebody who's an artist. So the bottom line is, all of this is spelled out in the wage orders.

And.

And if our participants on the podcast don't know what wage order they're covered by, that is the first line of business that is.

Absolutely. And for those of you that are Cal Chamber members on HR California, we have quite a bit of tools that can help you. We have a wage order wizard, and we also have worksheets that employers could download to help them figure out whether an employee is exempt or not. Because we do get a lot of questions, and I think there's a lot of myths out there, right, Such as, are employees going to be so much happier if they're exempt? Well, happiness is not going to help you in the eyes of the law.

Well, especially when they're temporarily happy, and then something happens, and then all of a sudden they say, hello, why am I being classified as exempt? I should be getting overtime.

Well, and I think this is a really good point to make. How do employers get into lawsuits over this just by that example? Right. They're a happy employee right now, but all of a sudden, you discipline them, and they've got a good friend who just passed the. And off to the races we go.

Well, and these days, it's even on Facebook, right? Facebook, there are lawyers who will advertise saying, are you paid overtime? If not, you probably should be. So even people who are happy see dollar signs. And unfortunately, with the way the law is written in California, particularly with the private Attorney General's act, where these PAGA claims are sort of representative actions, but they're a lot easier to prove than a class action. And we won't go through all the details on the podcast, but what employers need to is it is not difficult for a lawyer to say, you have misclassified or you haven't given rest breaks and meal periods, and it's too expensive to defend. You're going to end up in mediation settling for 10% on the dollar.

And I could understand, too, with exempt employees, we're not tracking the hours that they're working, so we're not requiring them to clock in or clock out. We have no idea what hours they're working.

Well, and what the Labor Commissioner says is, that's okay because whatever hours they say they worked are the hours that are going to apply. So all they have to do is say, yeah, I was average about 15 hours a day, and your hair's on fire. You're saying Nobody ever worked 15 hours a day, but what do you have to disprove that?

Right. And they never took a meal break and they worked overtime, and when they.

Were in the shower, they thought about you, so they want to charge you for that time, too.

So there's no evidence that an employer can use or have to rebut the employee's assertion.

Well, and let's Take that one step further.

Yeah.

Somebody on this who listens to the podcast is gonna say, that's all right. I'm gonna have them record their time anyway. Oh, excellent. Just in case.

Just in case.

But of course, at that point you're treating them like a non exempt employee. You've just eviscerated the exemption yourself. There's no way around this. You've gotta make sure that they are classified appropriately and then you treat them as such. Somebody wants to bring a claim later, you can deal with it. You'll have the tools at that point. But there should be an affirmative analysis every time. And the checklists you mentioned earlier are great, right? Because they help you think through what the are and how to go.

And Jen, what is the duration of time that an employee must be performing these exempt duties? Because I can see situations where, you know, an employee's duty evolves as they're working for you. And I think the working manager is such a great example of what can happen, particularly when you have that go getter who is going to get whatever needs to get done in order to beat the bottom line to meet metrics or whatnot. So what's the minimum duration that an employee needs to be working before they get thrown out of that exempt status?

Well, here's what's interesting. It's all done on a work week by. So you can have somebody who is exempt one week and non exempt the next week. So it's super frustrating. And this is all driven by federal law, by the way. So a lot of times California law gets, you know, criticized. Well, California's so crazy in the Republic of California. The truth is, a lot of the issues in wage hour are actually modeled after federal law. So it's not just an issue in California, but it's work week by work week. That's why I mentioned somebody calls in sick, somebody goes on vacation and the manager or supervisor decides, I'll just cover this. Yeah, right. Or the person in charge of facilities usually has a janitorial company doing that work. They decide, you know what, they're no good. I'm going to try it myself for a couple of weeks. They just lost the exemption. Now there's no exemption fairy who comes and notices that. So the whole thing comes into play when somebody's upset or when they notice that their pay isn't the way it should be or when they feel like they're being monitored. Now, one of the things I want to say before we're done that I think is so important is even when you have an exempt employee, you can still make them be present for core hours. You can still tell them what you want them to do. It's not like they're out there freewheeling, doing whatever they want to do.

I think that's really important.

But if you're tracking their hours and you want to adjust their pay accordingly, remember, exempt salary means not subject to variation based on the quantity or the quality of work. So that is a real fundamental principle that employers need to keep in mind.

I think that's a great point to raise because that is true. And I've seen that there have been cases on that where the employer deducts the salary because the individual wasn't working or wasn't present in the office for the week. And there's so many other things that we could talk about on exempt employees for another day. But before we conclude today, what can we suggest to employers that realize, oh, my gosh, I have a number of employees who are misclassified, or I have that working manager. How can I fix things and what do I need to do to mitigate? Now, of course, contacting legal counsel is absolutely important, but what are some of those things that we could at least let employers know so that that panic attack goes away a little bit?

One of the things that's so important is how you communicate why you're making the change. So we're working with a client right now who communicated it 180% the wrong way. California law makes us do this. We're sorry. We hope your pay will be the same, but we can't guarantee it. You gotta reverse engineer this so your employees are not taking a pay cut and you have to sell it to them, which is true. You're gonna get overtime for every hour you work. You get to take a rest break, you get to take a meal, period. So there has to be a positive spin. If you go into it like, oh, they're making us do this, they will look for a way to get out of it. The employees will look for a way to object. Then you have to be very careful because you got a three year statute of limitations. So you've got to figure out, okay, are we going to pay people off? Are we going to do what we call a pickup sticks type of settlement where we give everybody what we think we might owe them if they were misclassified? You never say, we totally misclassified you, because here's the truth. You don't know. A judge might say, you did it. Right?

Right.

The law is not that clear.

And that's the scary part of it. Yes, that's the scary part of it. And I think that what was really helpful there is, you know, you've got to change the mindset of your employees who think that being exempt is fabulous. Well, the thing is, is you could work, work, work, work, and you're getting paid the same amount of money. Whereas the hourly employees, they have a little bit more structure that comes to their day now. And the employer's gonna care when they're working overtime.

That's right. And there are a lot of organizations where the non exempt employees are making more than the supervisor. Right. Because they're working overtime.

Yes.

And of course that's a morale issue for the supervisor. But the employees need to understand, hey, when you're here, you're working.

Yes.

And you can still give them paid holidays, you can still give them good vacation pto. They're still gonna get their sick leave. So a lot of those benefits don't go away.

Right. I think in some respects it's probably more beneficial for some employees.

It really is. But you have to educate them to understand that. Because at first blush, people feel like you're restricting me. It's just like when we hire administrative staff in our firm, they're non exempt, but we quote them an annual salary.

Yes.

Because they're offended if you say $40 an hour. But if you say it's $80,000 a year, then they say, okay, now they're all paid as non exempt employees.

We get that a lot, actually. And I think this is a good point to end on this notion that we have a non exempt salary employee. And one of the things that I always try to press upon is when you're discussing how much somebody can make in a year, it's easy and it's beneficial to quantify it in a salary. But realistically, they're getting paid by the hour, so their paycheck is going to be different every time. Every time. But if they are here reporting to work every day during our work calendar, this is what their annual salary will be.

Right. And we're very careful about that in our offer letters where we say, you know, your salary for full time employment will be, you know, the equivalent of X if you work the hours as scheduled. Like, we're actually pretty picky about what to put in an offer letter.

I think that's actually really good advice because it's back to communication. Right. And for the employee to understand, this is how you're going to get to this number.

We're not guaranteeing you that number. We're saying if you do X and Y, you will end up at that number.

Well, another insightful topic today and one that I hope that folks have learned a little bit more and have a little bit more guidance. Thank you for joining us on the Workplace. Please comment, share and subscribe to Cal chambers podcast@calchamber.com.