Blog: The California Workplace Advisor

Last week, the California Supreme Court confronted questions from the Ninth Circuit about the application of California’s wage and hour laws to flight attendants and pilots who work primarily outside of California’s territorial jurisdiction.

Despite fact patterns specific to the airline industry, the decisions in Ward v. United Airlines, Inc. and Oman v. Delta Air Lines, Inc. provide much-needed guidance to a broader base of employers. Oman, in particular, is significant for employers who utilize commission and other non-traditional pay structures in trying to understand the California Labor Code and how it applies to their operations.

Ward v. United Airlines, Inc.
Ward began as three separate class actions filed by pilot Charles Ward and flight attendants Felicia Vidrio and Paul Bradley. Each of these California residents challenged United’s wage statements under California Labor Code section 226, which requires employers to provide certain information on employee pay stubs (including, among other things, the employer’s address). The Ward plaintiffs asserted that the wage statements did not include United’s street address, the hours worked during the pay period, and the applicable hourly rates.

Background
At the federal district court level, United succeeded on motions for summary judgment in each case, and on appeal, the Ninth Circuit certified two state law questions to the California Supreme Court:

1. whether Wage Order 9’s exemption for employees under a collective bargaining agreement (CBA) barred plaintiffs’ wage statement claims, and
2. whether section 226 applied when the employer was based outside of California and the employee, a California resident who pays state income tax, does not work principally in California.

Collective Bargaining Exemption Does Not Extend to Section 226’s Requirements
The Supreme Court concluded that Wage Order 9’s CBA exemption does not apply to section 226’s wage statement requirements. Most notably, the exemption is specifically limited to the wage statement requirements contained in the Wage Order itself. Section 226 sets forth independent wage statement requirements, and there is no language in the CBA exemption to suggest that it extends to section 226. Further, section 226 does not contain any such exemption.

California-Based Employees Are Entitled to Section 226-Compliant Wage Statements
Regarding the Ninth Circuit’s second question—whether the plaintiffs are entitled to wage statements that comply with Section 226—the Court held that the first consideration should be whether an employee works the majority of the time in California or in another state. Where employees do not work the majority of the time in any one state, the relevant question will be “whether the employee has a definite base of operations in California, in addition to performing at least some work in the state for the employer.” Under this analysis, a pilot or flight attendant with a designated home base airport located in California would be entitled to receive wage statements that comply with section 226.

The Court rejected several proposed tests advanced by the parties for determining section 226’s applicability, including United’s argument that the federal “job situs” test should determine whether an employee is entitled to the protections of a state’s labor laws. Under this test, an employee would be entitled to wage statements compliant with section 226 only if the employee performed all or most of their work in California. The Court noted that under this test, transportation industry employees such as truck drivers and airline personnel, who do not perform the majority of their work in any one jurisdiction, would not be entitled to the protections of any state’s laws.

The Court also rejected Ward’s argument that the analysis should consider an employee’s place of residence, receipt of wages, and payment of taxes. The Court pointed to its 2011 decision in Sullivan v. Oracle Corp., in which it extended California’s overtime laws to nonresident employees of a California corporation who worked in California for “full days and weeks” at a time. Thus, under Sullivan, “being a nonresident does not exclude an employee from the state’s labor protections.”

Oman v. Delta Air Lines, Inc.
The Oman case began when four nonresident Delta flight attendants filed a putative class and Private Attorneys General Act collective action challenging Delta’s compensation structure. The compensation structure used the highest paying of four potential formulas to compensate flight attendants by flight “rotation,” rather than by the hour. The flight attendants also alleged that Delta failed to pay them within the required semi-monthly time frames under Labor Code section 204 and to provide compliant wage statements pursuant to Labor Code section 226.

Background
The District Court ruled in Delta’s favor on two cross motions for summary judgment. On appeal, the Ninth Circuit certified three questions to the California Supreme Court:

1. Do sections 204 (wage payment timing) and 226 (wage statement contents) apply to an out-of-state employer with an employee who, in the relevant pay period, works in California only episodically and for less than a day at a time?
2. Does California minimum wage law (Sections 1182.12 and 1194 and Cal. Code Regs., tit. 8, § 11090, subd. (4)) apply to all work performed in California for an out-of-state employer by an employee who works in California only episodically and for less than a day at a time?
3. Does California’s case law against averaging wages apply to a pay formula that generally awards credit for all hours on duty, but which, in certain situations resulting in higher pay, does not award specific credit for each hour on duty?

California Wage Laws Apply Only to Pay Periods Where Employees Predominantly Work Here
The Court rejected the flight attendants’ argument that California’s laws requiring detailed wage statements and governing the timing of wage payments applied to any time worked in California, even just a minimal number of hours in any given pay period. These laws, the Court found, apply only to pay periods during which an employee predominantly works inside California. Thus, Labor Code sections 204 and 226, as well as California minimum wage laws, do not apply to work performed in California during pay periods in which the employee, based outside California, works primarily outside California.

Delta’s Compensation Structure Complies with California’s Minimum Wage Law
Turning to the third question about the legality of Delta’s compensation structure, the Court ruled that Delta’s pay structure complies with California’s minimum wage laws.

Delta’s pay structure compensated flight attendants based on each “rotation,” meaning the sequence of flights the flight attendant served on over a period of one or more days. There are four potential compensation formulas, and each flight attendant’s compensation is determined using the formula that will yield the most compensation to the employee for the rotation. Delta’s compensation structure guaranteed that each flight attendant would be paid, on an hourly average, above the California minimum wage for every hour worked.

The flight attendants argued that the structure violated California’s minimum wage law, in part, because the most frequently used formula was based solely on flight time, and did not factor in the hours flight attendants spend working on the ground before and after flights. The Court was asked to decide whether this structure violates California’s “no wage averaging” or “no wage borrowing” principle. “Wage borrowing” refers to the practice of taking compensation due for one set of hours and spreading or averaging it over other hours to satisfy the minimum wage. Prior California decisions barred this practice and, in Oman, the California Supreme Court clarified and affirmed this principle, while finding Delta’s pay structure compliant. The Court held that regardless of the method of compensation, the employer must pay at least minimum wage for all hours worked and employees must receive “the greater of (1) the amount guaranteed by contract for the specified task or period, or (2) the amount guaranteed by the minimum wage.”

The Court looked to Delta’s contractual commitments to its flight attendants, noting that its Work Rules specifically state that compensation will be determined by the rotation, rather than by the hour. Each of Delta’s four formulas for calculating compensation “guarantees that flight attendants are always paid above the minimum wage for the hours worked during each rotation without borrowing from compensation promised for other rotations.”

The case provides much-needed guidance and support for employers choosing to use innovative or other non-hourly contractual compensation structures that pay their employees at or above minimum wage for all hours worked.

Takeaways

• Employees whose home base of operations is California must receive wage statements that comply with Labor Code 226’s requirements.
• The wage statement exemption contained in Wage Order 9 for employees subject to certain collective bargaining agreements does not extend to Labor Code 226’s wage statement requirements.
• When non-exempt employees are paid through a non-traditional compensation structure rather than by the hour, employers should ensure that: (1) employees are paid at least minimum wage for all hours worked, (2) employees are compensated as required by any applicable collective bargaining agreements or employment contracts, and (3) the compensation structure does not practice “wage borrowing” or “wage averaging” by taking compensation due for one set of hours and spreading or averaging it over other hours to satisfy the minimum wage.

For more information, feel free to reach out to Hirschfeld Kraemer lawyers. Kirstin Muller is in the Los Angeles office, kmuller@hkemploymentlaw.com, (310) 255-1811. China Westfall is in the San Francisco office, cwestfall@hkemploymentlaw.com, (415) 835-9067.