California Supreme Court Addresses Critical Wage-and-Hour Issues for Employers Involved in Interstate Transportation and with Non-Traditional Compensation Plans

In a pair of overlapping opinions issued today – Ward v. United Airlines, Inc. and Oman v. Delta Air Lines, Inc. – the California Supreme Court addressed a wide variety of unsettled questions in California wage-and-hour law.  To summarize, the Court held:

1. The exemption in IWC Wage Order No. 9, section 1(E), for employees covered by a collective bargaining agreement governed by the Railway Labor Act, does not bar a wage statement claim brought under Labor Code section 226. (Ward)
2. Labor Code section 226 applies to wage statements provided by an employer if the employee’s principal place of work is in California. This test is satisfied if the employee works a majority of the time in California or, for interstate transportation workers whose work is not primarily performed in any single state, if the worker has his or her base of work operations in California. (Ward)
3. Labor Code sections 204 and 226 do not apply to pay periods in which an employee works only episodically and for less than a day at a time in California unless the employee works primarily in California during the pay period, or does not work primarily in any state but has his or her base of operations in California. (Oman)
4. California’s limits on “wage borrowing” permit compensation schemes that promise to compensate all hours worked at a level that is at or above the minimum wage, even if particular components of those schemes fail to attribute to each and every compensable hour a specific amount equal to or greater than the minimum wage. (Oman)

While these decisions are relevant for all California employers, they are of particular importance for employers involved in interstate transportation and those with non-traditional compensation plans.  

Ward v. United Airlines, Inc.

The Facts

The Ward case started as three separate class actions brought in California state court against United Airlines, Inc. (“United”) by Charles Ward (pilot), and Felicia Vidrio and Paul Bradley (flight attendants). All three flight crew members alleged that United’s wage statements failed to satisfy California Labor Code section 226 (wage statements). After United removed all three cases to federal court, the Vidrio and Bradley cases were consolidated.  

United successfully moved for summary judgment in both cases on the grounds that Labor Code section 226 does not apply to employees who do not work principally in California. Both sets of plaintiffs appealed, and the Ninth Circuit Court of Appeals consolidated the appeals. The Ninth Circuit then certified two unsettled questions of California law for review by the California Supreme Court. The opinion issued today answers both of these questions.

Question 1: Wage Order No. 9 exempts from its wage statement requirements an employee who has entered into a collective bargaining agreement in accordance with the Railway Labor Act. (See Cal. Code Regs., tit. 8, § 11090, subd. 1(E).)  Does the Railway Labor Act exemption in Wage Order No. 9 bar a wage statement claim brought under section 226 by an employee who is covered by a collective bargaining agreement?

Answer: No.  

California Labor Code section 226 requires employers to provide employees, “semimonthly or at the time of each payment,” with a written wage statement containing specific pieces of information.

Wage Order No. 9, which applies to workers in the “Transportation Industry,” sets out certain wage statement requirements that overlap with (but are narrower than) the requirements of section 226. Exempt from the Wage Order’s requirements are “employees who have entered into a collective bargaining agreement under and in accordance with the provisions of the Railway Labor Act.” 

The plaintiff crew members were all parties to a collective bargaining agreement entered into in accordance with the Railway Labor Act. While it was undisputed that United need not comply with the wage statement requirements of the Wage Order, United argued that the exemption from Wage Order No. 9 should similarly apply to Labor Code section 226.

The Court rejected United’s argument, explaining that section 226, by its plain terms, contains no such exemption, and that there is no basis in the statutory language or legislative history for inferring one.  

Question 2: Does section 226 apply to wage statements provided by an out-of-state employer to an employee who resides in California, receives pay in California, and pays California income tax on his or her wages, but who does not work principally in California or any other state?

Answer: Maybe.

As employees increasingly work across state lines, a frequent bone of contention is which state’s labor laws apply. This issue arises often for employers in the transportation industry.  In Ward, the California Supreme Court explained that when it comes to the regulation of interstate employment, the question that needs to be asked is “what kinds of California connections will suffice to trigger the relevant provisions of California law[?]” Importantly, “the connections that suffice for purposes of one statute may not necessarily suffice for another. There is no single, all-purpose answer to the question of when state law will apply to an interstate employment relationship or set of transactions.” 

The Court proceeded to examine specifically the types of “California connections” necessary to trigger Labor Code section 226. In a break from other “extraterritoriality” decisions, the Court declined to put any weight on factors such as the residence of the employee, location of the employer, location of receipt of wages, or location where taxes are paid. Instead, the Court focused on “whether the employee’s principal place of work is in California.” It explained: 

     [T]he Legislature intended for section 226 to apply to workers whose work is not performed predominantly in any one state, provided that California is the state that has the most significant relationship to the work. For interstate transportation workers and others who do not work more than half the time in any one state, we conclude this principle will be satisfied if the worker performs some work [in California] and is based in California, meaning that California serves as the physical location where the worker presents himself or herself to begin work.

In other words, the question whether section 226 applies is two-fold. First, consider whether the employee works more than half of his/her time in any one state.  If the answer is yes, and that state is California, section 226 applies. If the answer is yes, and that state is not California, section 226 does not apply. Second, if the employee does not work more than half of his/her time in any one state, consider “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.” If the answer is yes, section 226 applies.  If the answer is no, section 226 does not apply. (The Court did not address any additional considerations for employees “who are neither localized nor have any established base of operations in any state.”) 

Oman v. Delta Air Lines, Inc.

The Facts

In 2015, a group of current and former flight attendants for Delta Air Lines (“Delta”) filed a putative class action against Delta alleging that Delta violated California labor law by failing to pay its flight attendants at least the minimum wage for all hours worked. The plaintiffs also alleged violations of Labor Code sections 226 and 204 (which requires payment of wages on a semimonthly timeframe). After the federal district court granted summary judgment in favor of Delta on the minimum wage, wage statement, and timing claims, the plaintiffs appealed. As in Ward, the Ninth Circuit certified several unsettled questions to be determined by the California Supreme Court. The opinion issued today answers two of the three questions.

Question 1: Do sections 204 and 226 apply to wage payments and wage statements provided by an out-of-state employer to an employee who, in the relevant pay period, works in California only episodically and for less than a day at a time?

Answer:  Maybe.

Consistent with the statute-by-statute analysis required by Ward, the Court analyzed what “California connections” were sufficient to trigger section 204, and concluded that the “principal place of work” test articulated in Ward for purposes of section 226 applies equally to section 204. That is, Labor Code sections 204 and 226 do not apply to pay periods in which an employee works only episodically and for less than a day at a time in California unless the employee works primarily in California during the pay period, or does not work primarily in any state but has his or her base of operations in California.  

Question 2: Does California minimum wage law 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?  

Answer: Because its answer to Question 3 (see below) obviated any need to answer this question, the Court declined to “settle the reach of the state’s minimum wage laws.”  

Question 3: Does the Armenta/Gonzalez bar on 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 credit for all hours on duty?

Answer:  No.

Delta employed a complicated pay scheme for flight attendants that was set out in published “work rules.” Pursuant to these work rules, flight attendants’ pay was measured by the “rotation,” a given sequence of flights over a day or a period of days that the attendant would serve on. Compensation for each rotation was calculated according to four different formulas, and flight attendants were paid according to whichever formula yielded the largest amount for the complete rotation. The plaintiffs argued that one of Delta’s four formulas – the formula that most often determined how much flight attendants were paid – violated California minimum wage law because it was based solely on flight time and did not factor in hours flight attendants spent working on the ground before and after flights.  

The basis for the plaintiffs’ claim was a line of California Court of Appeal cases, beginning with Armenta v. Osmose, Inc., 135 Cal. App. 4th 314 (2005), that stands for the proposition that an employer may not take compensation contractually due for one set of hours and spread it over other, otherwise un- or undercompensated, hours to satisfy California’s requirement that employers pay at least minimum wage for all hours worked. This practice is commonly referred to as “wage averaging,” a term that the California Supreme Court specifically rejected in favor of the term “wage borrowing.”   

In today’s decision in Oman, the California Supreme Court for the first time endorsed the rule against “wage borrowing” established in Armenta and adopted in later Court of Appeal decisions, holding that an employer may not satisfy its obligation to pay at least the minimum wage for all hours worked by borrowing compensation contractually owed for one set of hours or tasks to rectify compensation below the minimum wage for a second set of hours or tasks.  

Having formally adopted the rule against “wage borrowing,” the Court then held that Delta’s four-formula method for calculating compensation did not violate this rule because it guaranteed that flight attendants were always paid above the minimum wage for the hours worked during each rotation without borrowing from compensation promised for other rotations. Under one of the four formulas (the “duty period credit formula”), pay was calculated by multiplying the flight attendant’s established flight pay rate by the total hours they spent on duty, divided by two. So long as the flight pay rate equaled or exceeded twice the applicable minimum wage, this formula ensured a flight attendant was paid for all hours worked in every duty period at no less than the minimum wage.  

The plaintiffs did not contend that any flight attendant’s flight pay rate was ever less than twice the applicable minimum wage. Rather, the plaintiffs argued that one of the other four formulas (the “flight time formula”), when triggered, ran afoul of the “wage borrowing” rule. Simplifying slightly, the flight time formula paid flight attendants based on time spent in flight, and did not directly factor in time spent “on duty” before and after takeoff. 

The Court rejected the plaintiffs’ argument that inclusion of this formula in the overall compensation scheme violated the “wage borrowing” rule. Even if the flight time formula might, in isolation, violate the “wage borrowing” rule, it did not within the broader context of Delta’s compensation scheme. The Court reasoned: “In all cases, flight attendants are guaranteed at least the amount of compensation owed under the duty period credit formula, which, as already discussed, always exceeds the minimum wage. To forbid Delta from offering greater pay than the amount owed under that formula based on the flight time formula or one of the other two formulas would do nothing to ensure workers are paid fair or adequate wages for all hours worked.”   

In a brief concurrence joined by Justice Cuéllar, Justice Liu wrote to caution employers against building into their contractual pay commitments (a critical element of the “wage borrowing” analysis) a “minimum wage floor – i.e., an agreement to make up the difference if an employee’s promised pay, averaged over all hours worked, falls below the applicable minimum wage.” In his view, this type of provision would impermissibly “circumvent the no-borrowing rule.” 

What Employers Should Know

The Ward and Oman decisions are dense and cover a lot of ground. Here are the key takeaways:

1. The wage statement requirements of Labor Code section 226 apply to employees who are otherwise subject to the collective bargaining exemption found in Wage Order No. 9. 
2. Employers involved in interstate transportation should reevaluate whether California’s wage statement (section 226) and pay timing (section 204) requirements may be applicable to any members of their workforce based on the newly articulated “principal place of work” test.
3. Employers with non-traditional compensation schemes should take care to ensure that they do not violate the “wage borrowing” rule, and should pay special attention to the precise terms of their compensation plans (including any “minimum wage floors” that might be built in).   

Please feel free to contact Payne & Fears LLP if you have any questions about how these cases might impact your business.