California Supreme Court: Apple’s Employee Bag Checks Are “Hours Worked”
When employees finish work, they typically punch out and head for the exit. But what if those employees have to show a supervisor or security agent their personal belongings, to ensure they are not in possession of company merchandise? That delay could be several minutes when bottlenecks occur.
Apple store employees argued that the time spent waiting to be checked out counted as “hours worked” under California’s Wage Order 7-2001. Today, the California Supreme Court agreed, affirmatively answering a question posed by the federal 9th Circuit court of appeals. The case is Frleken v. Apple Inc. and the opinion is here.
The Ninth Circuit’s question to the California Court was as follows:
Is time spent on the employer’s premises waiting for, and undergoing, required exit searches of packages, bags, or personal technology devices voluntarily brought to work purely for personal convenience by employees compensable as “hours worked” within the meaning of Wage Order 7?
The Ninth Circuit posed the question in part because under Federal law, the Fair Labor Standards Act, time spent undergoing security screenings is NOT compensable under the U.S. Supreme Court’s Integrity Staffing Solutions, Inc. v. Busk (2014) 574 U.S. 27. In that case, Amazon warehouse workers claimed security checks were compensable time under the Fair Labor Standards Act. But the Supreme Court rejected that claim.
As you know, California law is – er – different. First, the definition of “hours worked” under California law is more employee-friendly. Second, California law does not feature the Portal-to-Portal Act, a federal statute that amended the FLSA. So, long story short, despite Busk, the Ninth Circuit needed a specific ruling on California law. And here we are.
As with other “hours worked” decisions, the California Supreme Court focused on Apple’s “control” of the employees, because that is one of the key elements of whether time counts as “hours worked.” Employer control is just as important as whether the employee is actually “working” for the benefit of the employer. For example, when employees were required to meet at a central location and take company-provided transportation to a job-site, the time spent on the transportation counted as “hours worked” even though no work was performed. Morillion v. Royal Packing Co. (2000) 22 Cal.4th 575, 582. Why? Because the transportation was mandatory and the employer “controlled” all the employees’ time. And, when security guards had to carry radios so they might have to respond to calls during mandatory rest periods, they were not relieved of all duty and the time counted as “hours worked” – even if they never did any work. Augustus v. ABM Security Services, Inc. (2016) 2 Cal.5th 257. Same thing when guards were required to stay on site overnight in a trailer, even if they watched TV and did not actually “work.” Mendiola v. CPS Security Solutions, Inc. (2015) 60 Cal.4th 833, 840. The Court of Appeal long ago held that requiring employees to remain at the worksite during an unpaid meal period was sufficient to transform the unpaid lunch period into “hours worked.” Bono Enterprises, Inc. v. Bradshaw (1995) 32 Cal.App.4th 968, 972. California wage and hour law, amiright?
With respect to bag checks, the Apple employees were punched out and were not working. But one can see how employees argued they were under Apple’s “control” given the above decisions. The Court explained:
Apple controls its employees during this time in several ways. First, Apple requires its employees to comply with the bag-search policy under threat of discipline, up to and including termination.Second, Apple confines its employees to the premises as they wait for and undergo an exit search. Third, Apple compels its employees to perform specific and supervised tasks while awaiting and during the search. This includes locating a manager or security guard and waiting for that person to become available, unzipping and opening all bags and packages, moving around items within a bag or package, removing any personal Apple technology devices for inspection, and providing a personal technology card for device verification.
On the other hand, as Apple argued, employees did not have to bring personal bags to work, and could therefore avoid the screenings. Apple did not screen employees who had no personal bags or electronic devices. Apple argued that because employees could avoid the screenings, the Morillion line of cases did not apply. For example, when employers offer optional transportation from remote parking facilities to the worksite, the transportation does not count as hours worked. Overton v. Walt Disney Co. (2006) 136 Cal.App.4th 263, 271.
The Court rejected the argument that the bag checks were “optional” like in Overton and other cases. First, the Court distinguished between commuting and “time spent at work.” Unlike in the commuting context, where the employer’s interest in how the employee gets to work is small, the employer’s interest in controlling the employee’s potential for theft in its stores is high. The Court also believed that the amount of control was higher in the bag check context. Second, the Court believed that the optional commute cases involved situations that primarily benefited the employee: the employer offering a way for the employee to get to work. The Court rejected Apple’s argument that bag checks benefited the employees.
The Court was especially critical of Apple’s assertion that coming to work without a bag or electronic device is a true “choice.” Of course a “no personal property” rule is not necessarily a wise policy to impose, and it may result in unhappy or fewer employees. But employees do have a choice not to bring property to work, as some in fact did not. And there’s no law against Apple imposing a no-bag requirement, at least for now. Yes, I’m pretty sure Apple’s not going to impose that ban on employees’ carrying personal property – including personal iPhones. Because, like I said, it would tick off a lot of good employees. So, it’s probably a moot point. Employers with a libertarian streak who nevertheless are considering banning employees from bringing personal bags to avoid paying for security screenings should consider not only the employee relations concern, but also the Chief Justice’s critical language in this opinion.
The Court’s opinion was unanimous, authored by the Chief Justice. The Court also rejected Apple’s argument that the decision should apply prospectively only. Therefore, it will apply retroactively to any business that was conducting security screenings without paying for them in California. Eep.
So, employers that do security checks after employees punch out must find a way to either change the order so that the screening occurs before the punch, or find a way to pay for the screening after the punch. Alternatively, employers can find a way to have employees secure bags and such near exits so they are unable to access them during the shift. I’m sure you’ll think of something. Meanwhile, I’m thinking the iPhone 12 will be a little more expensive.
One more time – The case is Frleken v. Apple Inc. and the opinion is here.
Oh and Happy Valentine’s Day.
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Here’s a Tip About Service Charges
Readers who are concerned with tips and service charges may be interested in this post. Everyone else, click the X.
Way back when, I wrote this article in the San Francisco Daily Journal about tips and service charges. Most of it’s still fine. I believe the huge verdict referenced in the article was overturned on appeal. But one issue requires new attention.
In a nutshell, the Labor Code tightly controls “gratuities” or tips. Sections 350-352 define gratuity, and specify that gratuities belong entirely to the employees for whom the customer leaves them. The employer has some control over how gratuities are shared among the employees entitled to them, e.g., via tip “pooling,” an equitable way of sharing tips among staff. However, employers have to be careful not to include in the pool “agents” or managers and supervisors. In addition, employers cannot include in the pool employees who have nothing to do with the service that generated the tip – such as those who aren’t working. That said, case law allows lots tip-pool flexibility, such as sharing pooled tips among “back of the house” employees involved in a positive experience. There are further issues attendant to compliance with sections 350-352, but that’s not why we’re here today.
Today, we’re here to talk about service charges. It had been well understood that a “service charge” is *not* a gratuity and, therefore, not subject to the Labor Code sections pertaining to gratuities discussed above. Anyone who has worked in hospitality knows a service charge is a mandatory amount, imposed by the “house,” on the customer. The customer doesn’t set the amount. The customer pays the sum directly to the company, regardless of the quality of the service. Compare a tip: the customer decides the amount, and leaves it for the server.
The Division of Labor Standards Enforcement apparently understood the difference between service charge and gratuity. The DLSE expressly said so in its Enforcement and Interpretations Manual. At least two Court of Appeal could distinguish between a tip and a service charge as well. The IRS and U.S. Department of Labor know the distinction too. You see, there are big legal consequences that flow depending on whether a sum is a tip versus a service charge.
Enter the Court of Appeal in O’Grady v. Merchants Exchange Productions, Inc. The Court apparently had some difficulty accepting this bright line concept. The Court decided that a “service charge” could constitute a “gratuity” under the Labor Code, even if it was mandatory, even if the employer set the amount, even if the customer paid it directly to the banquet company rather than the server, and even if the employer set the amount at 21 percent, not a normal amount for a tip. Why? Well, the Court apparently didn’t like the employer’s power to assign a label of “service charge” and remove the employees’ “rights” to gratuities, among other reasons.
The Court acknowledged its holding was in conflict with a couple of earlier decisions. However, it did not acknowledge the havoc its decision would cause if the IRS or DOL or DLSE decided that an “O’Grady“-gratuity turned out to be a service charge under the Tax Code or the Fair Labor Standards Act. (The characterization of tip v. service charge affects IRS obligations, the DOL/DLSE regular rate of pay, etc.). Moreover, as stated, for California wage and hour purposes, the employer can share a service charge with management — like a catering manager – but not a gratuity. That’s what O’Grady is about. Ms. O’Grady wants all 21 percent of the service charge Merchants Exchange charged the banquet customers, whether she provided good service or bad.
Anyway, the O’Grady opinion issued. And when a Court of Appeal disagrees with sister courts, the California Supreme Court may step in to resolve the conflict. Merchants Exchange asked the Supreme Court to do just that. Yours truly even submitted a letter in support of Merchants Exchange’s Petition for Review. But the California Supreme Court declined to take the case (although two Justices voted to do so). So, O’Grady remains on the books. Courts may have to decide case by case whether a “service charge” is a tip or not.
What does this all mean? It means that restaurants, hotels, and banquet companies that impose mandatory service charges must be careful how they present the “service charge” to customers to avoid ambiguity. For example, the Court of Appeal accepted O’Grady’s allegation that the customers may have been tricked into believing that all of the “service charge” would be paid to the service employees. Even the term “service charge” vexed the Court of Appeal, so perhaps another term is necessary. Employers will have to work with counsel and, presumably, their marketing departments, to develop the appropriate strategy.
The case is O’Grady v. Merchants Exchange and the opinion is here.
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February Brings a New I-9 Form and More
Welcome to February! Groundhog Day is behind us again. The Kansas City Chiefs broke a 50-year dry spell – “Feels great, Baby!” ::cough:::. And it’s time to start presidential primary season! Groundhog Day is behind us again. (SWIDT?)
What joys could a humble employment law blog bestow on you to mark milestones such as these? Prepare to be disappointed. Unless, that is, you like a good segue.
Milestones such as the above transcend employment law. But employers and HR professionals have annual obligations and milestones of their own to note. They have grown over the years such that HR Departments should have calendars full of reminders of annual deadlines, plus those new dates that come up from time to time. Here are some timely and current examples for February 2020.
For example, January 31, 2020 was the date that employers were supposed to start using the NEW and IMPROVED Form I-9, courtesy of the U.S.C.I.S. You can find out about the changes and obtain your new I-9s here. The USCIS announced the form in October 2019.
Also, February 1 was the deadline for posting those injury logs for Cal-OSHA. More information is available from Cal-OSHA here. This obligation comes up every year.
BONUS: Now that you have issued your W-2s, it’s a good time to make sure you also provided your notices regarding Flexible Spending / Dependent Care Account Balances, and Earned Income Credits, all required by California and/or Federal Law (in the case of the latter). The Flexible Spending / Dependent Care notice requirement is new this year, per Labor Code section 2810.7. But the Earned Income Credit Notice has been around a while. EDD information here. Hopefully your payroll service takes care of that for you, if you have one. Both of these are annual obligations.
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Cal. Supreme Court to Decide How to Calculate Meal and Rest Period Penalty
Back in October 2019, the Court of Appeal decided that a meal or rest period penalty is calculated as one hour of pay, at the employee’s base rate of pay (exclusive of the value of bonuses, commissions, etc.). Remember? Here’s our original post about Ferra v. Loew’s Hollywood Hotel, LLC. And here is an update: The California Supreme Court voted 7-0 to grant Ferra’s request for review of the case.
Until the high Court issues its decision, Ferra is no longer a precedent on which employers may rely. That means employers are without any binding legal authority regarding whether to pay meal period penalties at the employee’s base rate of pay, or at the “regular rate” of pay used to calculate overtime.
There has been ambiguity regarding this issue of how to calculate the hourly meal / rest period penalty. That is because the Labor Code says that the meal / rest period penalties are based on the “regular rate of compensation.” Wage and hour wonks – like you – likely noticed the term “regular rate of compensation ” sounds a bit like the “regular rate of pay,” which is used to calculate overtime.
Well, are they the same? The Court of Appeal in the Ferra case said “no,” 2-1. But the California Supreme Court is going to decide once and for all, it seems.
Now, the “regular rate” used for overtime calculations seems like a cumbersome way to calculate a meal period penalty. The regular rate may depend on earnings that occur after the penalty is incurred, such as an annual or quarterly bonus. And if the Legislature had meant regular rate used for overtime, it certainly could have said so. On the other hand, “regular rate of compensation” does sound a lot like “regular rate of pay.” And what if an employee is not paid hourly? Also, federal district courts have ruled both ways on this issue, so they’re no help.
We’ll have to see how this turns out in a couple of years. Until then, employers should consult with counsel regarding whether to pay meal / rest period penalties at the employee’s base hourly rate, the “regular rate of pay” or some other rate.
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Federal Court Joins Superior Court and Enjoins AB 5 re Interstate Truckers
A federal district court issued a preliminary injunction against AB 5 based on federal law preemption. The court held the Federal Aviation Administration Authorization Act, which applies to about 70,000 interstate truckers, likely preempts AB 5’s applicability to those truckers covered by the FAAAA. The preliminary injunction in California Trucking Association v. Becerra is here. The injunction will stay in effect through trial or until the 9th Circuit says otherwise. After trial, the injunction could become permanent.
Basically the Court decided that the truckers have a good argument that AB 5 interferes with trucking companies’ ability to manage their businesses, set trucking rates, and enter contracts with customers because they cannot choose to deal with independent contractors versus employees. That interference is what violates the FAAAA, which is intended to create a uniform, interstate standard to promote commerce. Here is the money quote:
the State of California has encroached on Congress’ territory by eliminating motor carriers’ choice to use independent contractor drivers, a choice at the very heart of interstate trucking. In so doing, California disregards Congress’ intent to deregulate interstate trucking, instead adopting a law that produces the patchwork of state regulations Congress sought to prevent. With AB-5, California runs off the road and into the preemption ditch of the FAAAA.
Judge Benitez’s trucking analogies are firing on all cylinders, as you can see.
So, AB 5 is garaged as to interstate truckers for now. But the 9th Circuit may tire of FAAAA preemption arguments and wreck the truckers’ case. Yeah, that left me flat too. I’m going to exit.
But before I go… if you’re the optimistic sort, there are rumblings online of protests and other organizing brewing to amend and even repeal AB 5. Maybe it will have an effect; maybe not So, if you want this law changed, make your voices heard and maybe something will happen. Remember, the exceptions in AB 5 are in there because someone asked for them….
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