Reprint from Orange County Lawyer Magazine October 2018. Written by Cynthia Flynn.

Any employer with hourly, non-exempt employees in California, probably knows to pay overtime if they work more than 8 hours a day or 40 hours a week.  They are also doubtlessly aware that the Labor Code requires certain information to be disclosed on employees’ pay stubs, such as the employer’s correct name and address (no P.O. Boxes), each applicable rate of pay (regular and overtime) and hours worked. Cal. Labor Code §§ 226(a), 510(a). Failing to comply with these laws can mean lawsuits, including class actions and representative actions that could cost millions.  While there are exceptions that allow employers some flexibility – such as with alternative work schedules – these, too, come with rules that must be followed.

In Maldonado v. Epsilon Plastics, Inc., 22 Cal. App. 5th 1308 (2018), a class action, the trial court had awarded damages for unpaid overtime due to Epsilon’s improper alternative work schedule, and then awarded penalties for failure to state the amount of overtime Epsilon should have paid in the employees’ wage statements.  The Court of Appeal upheld the decision as to Epsilon’s failure to pay overtime, but reversed as to the wage statement violations, confirming that employee paystubs should reflect amounts actually paid – not the amounts that should have been paid. Id. at 1327, 1334. Maldonado thus highlights two issues that California employers should heed – the need to follow the proper procedures to adopt an alternative workweek schedule that contravenes the generally-applicable Labor Code provisions, and the need to ensure wage statements provide all required information.

Epsilon Plastics’ business relied on machinery that could not be turned off each night without incurring significant costs.  The company incurred expenses each time the machines were shut down, including wasted plastic, wear and tear, and a six-hour wait after restarting for them to start running again. Maldonado, 22 Cal. App. 5th. at 1312-1313. Epsilon wanted to hire two shifts of workers, with an Alternative Workweek Schedule (called an “AWS”) under which employees would work 4 days one week for 12 hours a day, followed by 3 days the next week for 12 hours a day, alternating back and forth between 3 and 4 days. However, under the AWS, Epsilon did not pay 4 hours’ overtime for work over 8 hours a day, instead paying 2 hours’ overtime for each day’s work that exceeded 10 hours. Maldonado, 22 Cal. App. 5th at 1313.

Epsilon also kept a different type of schedule at various times during the class period, in which employees had to work 8 hours a day for 10 days straight, followed by 4 days off when the facility shut down.  It structured this schedule such that employees never earned overtime because they would work 5 days in one week followed by 5 days in the next week.  Id. at 1313-1314. This, however, was not a true “alternative workweek schedule,” although it implicated other Labor Code provisions. Id.

Ordinarily, employees must be paid overtime if they work more than 8 hours a day, at the rate of one-and-a-half times their regular rate of pay.  Cal. Labor Code § 510(a). However, there are exceptions, including for “an alternative workweek schedule adopted pursuant to Section 511.”  Id. § 501(a)(1).  The Wage Order for each industry provides the rules employers must follow if they wish to adopt an AWS.  Maldonado involved manufacturing, so Wage Order 1-2001 governed.  22 Cal. App. 5th at 1314 (citing Cal. Code Regs., tit. 8, § 11010).  Wage Order -2001, in turn, allows an AWS providing overtime after 10 hours of work rather than 8, if and only if the employer takes certain steps first:

1. to provide a written, proposed agreement setting out the terms of the AWS;
2. to fully disclose all effects of the arrangement on employees’ wages, hours, and benefits, and to hold a meeting no later than 14 days before the affected employees vote;
3. to hold an election in which affected employees vote by secret ballot on whether to adopt the AWS; a 2/3 “yes” vote is required;
4. to refrain from coercing or intimidating employees to vote either for or against the AWS;
5. to report the election results to the Department of Labor Statistics and Research within 30 days of the vote; and
6. to wait 30 days after the vote before requiring any employees to work according to the AWS.

Id. at 1314-1315 (citing Cal. Code Regs. Tit. 8, § 11010(3)(B) & (C)(1)-(8)).

In Maldonado, the trial court found, and the appellate court agreed, that Epsilon Plastics had not followed these steps on any of the four occasions it implemented the AWS, and therefore violated the Labor Code’s overtime provisions. Id. at 1327.  The AWS was first implemented by Epsilon’s predecessor before it acquired the plant; the court found some evidence that the predecessor held a vote after implementing the AWS, but no evidence that voting occurred before the AWS.  Although Epsilon conducted a “revote” several years after taking over the plant to “confirm” the AWS, that “revote” did not comply because there was no meeting and because a salaried supervisor voted. (Voting is to be limited to affected hourly employees.)  Id. at 1316-17.

The second time Epsilon adopted the AWS, the company instructed its Human Resources administrator to conduct the vote.  She reviewed the Department of Labor’s website, but although the company provided her access to counsel, she did not avail herself of this assistance.  Id. at 1317.  Consequently, Epsilon failed to follow the rules yet again.  The letter proposing the AWS did not inform employees that, if they voted in favor, they would be giving up their right to earn overtime if they worked more than 8 hours.  At the meeting, employees were told the AWS would go into effect, and employee witnesses confirmed that Epsilon made clear the AWS “was going to happen anyway,” so there was no point in voting against it.  Predictably, the employees voted “yes,” but Epsilon implemented it 6 days later, rather than waiting the required 30 days.  Id. at 1317-18. The court found, and the appellate court agreed, that the next two times Epsilon implemented the AWS likewise failed to comply with the Wage Order.  Id. at 1318-19.  Epsilon conducted no vote at all the third time and had employees vote after implementing the AWS a fourth time. Id.

The trial court in Maldonado also awarded damages for other claims, including penalties for Epsilon’s failure to include information on employees’ wage statements required under Labor Code section 226(a).  The trial court awarded penalties to the employee class because in addition to failing to pay overtime for the ninth and tenth hours worked due to the improperly-adopted AWS, Epsilon also failed to list those hours as overtime on the employees’ wage statements.  Maldonado, 22 Cal. App. 5th at 1334.  Section 226(a) of the Labor Code requires that “[a]n employer, semimonthly or at the time of each payment of wages, shall furnish to his or her employee, either as a detachable part of the check, draft, or voucher paying the employee’s wages, or separately if wages are paid by personal check or cash, an accurate itemized wage statement in writing showing…” nine items, including “(1) gross wages earned, (2) total hours worked…, (5) net wages earned, … and (9) all applicable hourly rates in effect during the pay period and the corresponding number of hours worked at each hourly rate by the employee….”  Cal. Labor Code § 226(a).

The Court of Appeal, however, disagreed that these wage statement penalties were due. First, Maldonado noted that penalties were only appropriate for violations of section 226(a) if the employee suffered injury “as a result of a knowing and intentional failure by an employer to comply with subdivision (a).”  Maldonado, 22 Cal. App. 5th at 1335 (citing Cal. Labor Code § 226(e)(1)). A legal presumption of injury would apply if Epsilon failed, under Labor Code section 226(a)(9), to list all applicable hourly rates and the corresponding number of hours worked at each rate.  Id. at 1336.  However, as Epsilon argued, the wage statements were accurate because they correctly reflected the rates actually paid and the hours worked at each rate.  The fact that a court later decided that Epsilon should have paid overtime did not change the fact that the wage statements Epsilon issued exactly matched the amount each employee was paid in base pay and overtime, and how many hours were compensated at each rate. Id.  In fact, Epsilon explained, the only way it could have “complied” with section 226(a)(9) as plaintiffs interpreted it would have been to issue paychecks with wage statements that had no bearing on the amounts actually paid. Id.

The court adopted Epsilon’s “commonsense position,” which, the court explained, was also supported by section 226’s legislative history. Id.  The purpose of the section is to “document the paid wages to ensure the employee is fully informed regarding the calculation of those wages.”  Id. at 1337 (quoting Soto v. Motel 6 Operating, L.P., 4 Cal. App. 5th 385, 392 (2016)).  The purpose of the section is not, in other words, to force an employer to pay penalties on top of damages for failure to pay employees at the correct rate.

The appellate court’s rulings in Maldonado underscore the importance of carefully evaluating, not only the Labor Code but the applicable Wage Order and relevant precedent in making decisions affecting hourly employees.  Had Epsilon’s Human Resources manager consulted counsel, instead of relying on a review of the Department of Labor’s website, the company could have avoided hundreds of thousands of dollars in damages in a class-action lawsuit.  Wage and hour litigation is highly specialized, and the advice of competent counsel can ensure employers avoid pitfalls before a lawsuit is filed.

Cynthia H. Flynn practices employment law and is the managing partner of Hackler Flynn & Associates. She can be reached at Cindy@HacklerFlynnLaw.com.