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Your Legal Corner - Client Alert Blog

Sept. 2010 9th Circuit Court Decision on Overtime Pay

Written By: Melissa C. Marsh, Esq., California Attorney, October 2010 Add to Favorites
On September 27, 2010, the Ninth Circuit Court of Appeals affirmed the trial court’s decision in Wang v. Chinese Daily News, 435 F.Supp.2d 1042 (2006), which held that newspaper journalists and commissioned salespersons' for the Chinese Daily News were improperly classified as exempt from overtime pay under both federal and California law. In Wang, the Ninth Circuit Court of Appeals addressed: (1) whether journalists and commissioned salespeople were exempt from overtime pay, (2) how to calculate the number of overtime hours worked; (3) how to calculate the amount of overtime pay owed; and (4) wages owed for missed meal and break periods.

1. Are Journalists and Commissioned Salespeople Who Sell Advertising Exempt From Overtime Pay?

In Wang, the Ninth Circuit Court of Appeals first addressed the defendant newspaper’s argument that its journalists and commissioned salespersons were exempt from overtime pay under the "creative professional exemption" and the "commissioned salespersons exemption" and as such were not entitled to overtime pay and other benefits under either the Fair Labor Standards Act and California state law.

Journalists and Reporters are Generally Not Exempt From Overtime Pay under the Creative Professional Exemption.

In Wang, the District Court disagreed with the defendants assertions and determined that the journalists who worked for the Chinese Daily News were NOT exempt from overtime pay. The Court reasoned that the exemptions from overtime pay set forth in the federal Fair Labor Standards Act (FLSA) and California law are to be "narrowly construed against the employers seeking to assert them" and the exemptions from overtime pay should be limited to employers who can "plainly and unmistakably" establish that each element of the exemption has been met by "clear and affirmative evidence." The Court citied: Reich v. Newspapers of New England, Inc., 44 F.3d 1060, 1070 (1st Cir.1995); Cleveland v. City of Los Angeles, 420 F.3d 981, 988 (9th Cir.2005); and Donovan v. United Video, 725 F.2d 577, 581 (10th Cir.1984). Citing Mitchell v. Lublin, McGaughy & Assoc., 358 U.S. 207, 211(1959), and added that the FLSA should be interpreted liberally in the employee's favor.

According to the Court, to satisfy the requirements of the "creative professional exemption" under federal law (29 C.F.R. § 541.302), a journalist's primary duties must consist of "work requiring invention, imagination, originality or talent, as opposed to work which depends primarily on intelligence, diligence and accuracy." The Court held that the reporters were not exempt from overtime pay under federal law because "[t]he majority of reporters do work which depends primarily on intelligence, diligence, and accuracy. See, e.g., Reich v. Gateway Press, Inc., 13 F.3d 685, 699-700 (3rd Cir.1994)…. Indeed, there appears to only have been a single case in which a court found a newspaper reporter to be exempt [from overtime pay]. Sherwood v. Washington Post, 871 F.Supp. 1471 (D.D.C.1994)."

In Wang, the Court considered the facts that the journalists for the China Daily News wrote between two and four articles per day most of which merely recounted public information, and to the Court the "intense pace" under which the reporters worked made it virtually impossible for them to either contribute sophisticated analysis, or perform any investigative reporting (an element required for the federal overtime exemption to apply). Consequently, the Court held that the reporters were misclassified as exempt from overtime pay, when in fact they were entitled to both overtime pay and meal and rest breaks as required by California law.

The defendant newspaper further argued that even if its reporters were not exempt from overtime pay they should not be liable for unpaid overtime since the newspaper did not know, nor should it have known, that its reporters worked overtime hours. The defendants cited Forrester v. Roth's I.G.A. Foodliner, Inc., 646 F.2d 413, 414 (9th Cir.1981), in which the Ninth Circuit Court of Appeals held that “where an employer has no knowledge that an employee is engaging in overtime work and the employee fails to notify the employer or deliberately prevents the employer from acquiring knowledge of the overtime work, the failure to pay overtime is not a violation of the law”. The Ninth Circuit Court of Appeals disagreed with the defendant’s argument stating that the facts in Wang were materially different from the facts presented in Forrester. According to the Court, the defendant newspaper knew, and at the very least should have known, that its reporters worked overtime hours because the defendant newspaper: (1) told many of its reporters they were exempt from overtime; (2) had received multiple complaints about the overtime hours worked; (3) did remit payment of overtime at an earlier time; and (4) was constantly kept apprised of the work in progress at all hours of day and night. The Court further noted that both state and federal cases have consistently held that employers can be liable for unauthorized overtime. See, Morillion v. Royal Packing Co., 22 Cal.4th 575, 582, 94 Cal.Rptr.2d 3, 995 P.2d 139 (2000) and Lindow v. United States, 738 F.2d 1057, 1060-61 (9th Cir.1984).

Commissioned Salespeople Who Sell Ads For Newspapers are Not Exempt From Overtime Pay.

In Wang, the defendants argued that their salespersons were exempt from overtime under the federal commissioned salesperson exemption and the California outside salespeople exemption. The Ninth Circuit Court of Appeals disagreed.

According to the Court, overtime exemptions "are to be narrowly construed against the employers seeking to assert them" and employers bear the burden of proving that exempt employees "plainly and unmistakably" fit within each element of the asserted exemption. Cleveland v. City of Los Angeles, 420 F.3d 981, 988 (9th Cir.2005).

The federal commissioned salesperson exemption from overtime pay set forth in 29 U.S.C. § 207(i) provides that an employee of a retail or service establishment is exempt from overtime pay if: (1) the employee receives more than 1.5 times the minimum wage and if (2) more than half the employee's compensation comes from commissions earned on the sale of goods or services. In the instant case, the Ninth Circuit Court of Appeals stated that while the defendant’s salespeople did in fact earn a commission on the sale of advertising and while their wages were in excess of 1.5 times the minimum wage, the federal exemption did not apply because the defendant employer was NOT a retail establishment as defined in either: (1) 29 C.F.R. § 779.317, which specifically states that newspaper publishers are "establishments to which the retail concept does not apply," or (2) Wirtz v. Idaho Sheet Metal Works, Inc., 335 F.2d 952, 956 (9th Cir.1964), in which the Court noted that the commissioned salesperson exemption applies only to commercial establishments like a "local merchant, corner grocer, or filling station operator who sells to or serves ultimate consumers."

The Court next considered whether the defendant’s commissioned salespeople were exempt from overtime pay under California law. According to the Court, to be exempt from overtime pay under California law the employer must prove: (1) the employee is selling a product or service; (2) the employee receives more than half their compensation in commissions; (3) the employee’s regular rate of pay exceeds 1.5 times the minimum wage; and (4) that the employee's commissions reflect a percentage of the price of the product or service sold. See, Ramirez v. Yosemite Water Co., 20 Cal.4th 785, 803-04 (1999). In the instant case, the Court of Appeals determined that the defendant failed to prove that the commissions earned reflected a percentage of the price of the advertising sold, and consequently the defendant did not satisfy all of the elements required under the Commissioned Salesperson Exemption under California law.

Are Outside Salespeople Exempt or Non-Exempt From Overtime Pay?

For an outside salesperson to be exempt from overtime pay under federal law, the salesperson must be "customarily and regularly engaged away from the employer's place or places of business in performing such primary duty." See 29 U.S.C. § 213(a)(1) and 29 C.F.R. § 541.500(a). In the instant case, the newspaper’s sales force worked at the company’s offices.

According to the Court, to be exempt from overtime pay under California’s Outside Salesperson Exemption the employer must prove: (1) the employee is an "outside" salesperson, who spends more than 50% of their time engaging in sales activities outside the employer's place of business; or (2) the employee earns at least 1.5 times the minimum wage and more than half of that employee’s compensation comes from commissions. See, Cal. Labor Code § 1171 and IWC Wage Order 4(2)(M). In <u>Wang</u>, the Court determined that the defendant newspaper failed to prove that its salespeople spent more than 50% of their time away from the office and in turn denied the applicability of California’s Outside Salesperson overtime pay exemption.

Are Inside Salespeople Exempt or Non-Exempt From Overtime Pay?

The Court noted that California’s "inside" sales exemption from overtime only applies to employees who are employed in either: (1) the "mercantile industry" (covered by Industrial Wage Order #7), or (2) a "professional, technical, clerical, mechanical and similar occupation" (covered by Industrial Wage Order #4). The "Mercantile Industry" means any business operated for the purpose of purchasing, selling, renting, or distributing wholesale or retail goods. The "Professional, Technical, Clerical, Mechanical, and Similar Occupations" include most professions but does not apply to restaurants, hotels, health clubs, entertainment and production companies, contractors, manufacturers, or repair shops. When it comes to California’s “inside sales exemption” what is truly important is not just how much time is spent on sales activities, but the primary purpose of the business for which the inside sales employee is employed. For example, an inside sales employee for a print shop that is paid on commission would be exempt from overtime under Industrial Wage Order #4, but an inside sales employee for a health club paid on commission for signing up new members would <u>not</u> be exempt from overtime under Industrial Wage Order #2.

In Wang, the employer wrongfully classified its salespersons as exempt from overtime and did NOT keep track of the number of hours its employees worked. When a company fails to keep accurate records of the hours worked by its employees, a rebuttable presumption is created that the evidence presented by the employees as to the hours worked is correct. See, Anderson v. Mt. Clemens Pottery Co., 328 U.S. 680, 687-88 (1946). The Court of Appeals in turn affirmed the trial court’s decision on the number of hours worked as proved by the defendant’s employees.

How To Calculate Overtime Pay.

Pursuant to California law, non-exempt employees working overtime are entitled to pay at 1.5 times their regular rate of pay. "The "regular rate of pay" includes "all remuneration for employment paid to, or on behalf of the employee," not simply the base rate, or hourly rate, of pay. 29 U.S.C. § 207(e). There is a "statutory presumption . . . that remuneration in any form is included in the regular rate calculation. The burden is on the employer to establish that the remuneration in question falls under an exemption." Madison v. Resources for Human Development, Inc., 233 F.3d 175, 187 (3rd Cir. 2000).

Nondiscretionary Employee Bonuses Are Part of the Employee’s Regular Rate of Pay.

According to the Court, discretionary bonuses that are not based on an contractual promise may be excluded from the "regular rate" of pay [29 U.S.C. § 207(e)(3)(a)], but bonuses paid out regularly, remitted as a consequence of meeting objective criteria, or that are performance based must be included in the calculation of the employee’s “regular rate” of pay. See, DLSE Enforcement Manual Section 34.4.4 and Marin v. Costco Wholesale Corp.,169 Cal.App.4th 804 (2008). Once the employee’s regular rate of pay has been determined, then the employer must remit payment of 1.5 times the employee’s regular rate of pay for all hours worked in excess of 8 hours in one day, and 40 hours in one week.

Meal Allowances May Also Be Part of the Employee’s Regular Rate of Pay.

Daily meal allowances paid to employees should also be included when calculating an employee’s regular rate of pay if the meal allowance is not an actual reimbursed business expense.

Meal and Rest Breaks.

Pursuant to California law, “[a]n employer may not employ an employee for a work period of more than five hours per day without providing the employee with a meal period of not less than 30 minutes.” Cal. Labor Code §512(a). If an employer fails to provide the employee with a meal break, California Labor Code § 226.7(b) requires the employer to pay the employee one additional hour of pay at the employee's regular rate of pay for each day that a meal or rest period was not provided.

In Wang, the jury determined that the defendant did not “provide” its journalists with meal and rest breaks as required under Cal. Labor Code §512(a), and the Ninth Circuit Court of Appeals affirmed.

The Court also concluded that the California Supreme Court's pending decisions in two cases, which ask the Court to decide whether employers need only "provide" meal breaks in the sense that they do not prohibit or prevent employees from taking such breaks, or whether employers have an affirmative obligation to ensure their employees actually take their breaks, was immaterial since the Defendant did not even offer its employee’s the option of taking a break. See, Brinkley v. Pub. Storage, Inc., 167 Cal.App. 4th 1278, 1290 (2008), review granted, 198 P.3d 1087 (Cal. Jan. 14, 2009) and Brinker Rest. Corp. v. Super. Ct., 165 Cal.App. 4th 25 (2008), review granted, 196 P.2d 216 (Cal. Oct. 22, 2008); and see, Jaimez v. DAIOHS USA, Inc., 181 Cal.App. 4th 1286, 1303 (2010), which discusses the unresolved law on meal breaks.

The Court of Appeals in Wang further concluded that the requirement to pay an additional hour of pay for each missed break under California Labor Code §226.7 is a "wage," and not a "penalty," and therefore subject to a four-year statute of limitations.

Claims under Business and Professions Code §17200

The Court of Appeals in Wang upheld the district court’s ruling that bringing various claims under the FLSA "does not preempt a state-law [Business and Professions Code] §17200 claim that ‘borrows’ its substantive standard from FLSA."


Tags: california overtime laws, overtime pay
Posted In: Employment Law News 


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Located in Los Angeles, California, the Law Office of Melissa C. Marsh handles business law and corporation law matters as a lawyer for clients throughout Los Angeles including Burbank, Sherman Oaks, Studio City, Valley Village, North Hollywood, Woodland Hills, Hollywood, West LA as well as Riverside County, San Fernando, Ventura County, and Santa Clarita. Attorney Melissa C. Marsh has considerable experience handling business matters both nationally and internationally. We routinely assist our clients with incorporation, forming a California corporation, forming a California llc, partnership, annual minutes, shareholder meetings, director meetings, getting a taxpayer ID number (EIN), buying a business, selling a business, commercial lease review, employee disputes, independent contractors, construction, and personal matters such as preparing a will, living trust, power of attorney, health care directive, and more.