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Employer Prevails on Major California Case Involving Overtime, Partial Days Off
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August 22, 2005
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Thelen Reid Brown Raysman & Steiner LLP
In a case of first impression under California law, the right of California employers to require employees to use accrued vacation for partial-day absences without defeating the "salary basis" element of their overtime exemption was upheld. Conley v. Pacific Gas & Electric Co., 2005 WL 1693801, 2005 DJDAR 8803 (1st Dist. Cal.App. 2005). The ruling spares California employers from massive potential overtime liabilities.
Before Conley, no reported decision had addressed the legality under California law of debiting leave banks for partial day absences. Although the Conley decision is consistent with federal law, the California Division of Labor Standards Enforcement ("DLSE") had issued several advisory opinion letters expressing the view that debiting vacation and PTO leave banks to cover partial day absences was unlawful in California because of the "special" and non-forfeitable status of vacation pay under California Labor Code §227.3 and the California Supreme Court's decision in Suastez v. Plastic Dress-Up Co., 31 Cal.3d 774 (1982).
In its published opinion, the Conley court rejected the reasoning of DLSE's advisory opinions and concluded that PG&E's pay practice does not result in a forfeiture of vacation in violation of either §227.3 or Suastez. Consequently, PG&E's practice does not destroy the "salary basis" of its exempt employees' compensation or their exempt status.
Background
The Conley case was filed in 2000 against PG&E, the state's largest public utility. The plaintiffs challenged PG&E's practice, common to most California employers, of debiting the accrued but unused vacation or PTO accounts of exempt employees for partial-day absences. The plaintiffs alleged that this practice was inconsistent with "salary basis" compensation, a requirement for exempt status under California law.
The term "salary basis" refers to provisions in the federal Fair Labor Standards Act that require exempt employees to be paid a "salary" as opposed to an hourly wage and that deem exempt employees converted to non-exempt status subject to overtime requirements if the employer docks their salary for partial-day absences. Federal court decisions and the U.S. Department of Labor have universally determined that debiting an employee's vacation account does not implicate an employee's salary basis.
The California Labor Commissioner issued a series of opinion letters on the legality of various payroll and vacation practices. Contrary to federal law, the Labor Commissioner wrote that vacation was equivalent to salary and that debiting vacation accounts for partial-day absences was the same as docking salary for partial-day absences. Seizing on these opinion letters, the plaintiffs sought to certify a class of 200 employees based on job duties and also a class consisting of all exempt employees who were subject to PG&E's vacation policies - a class that covered all PG&E exempt employees, including its president and officers. Based on this theory, plaintiffs also sought to recover more than $100 million in unpaid overtime, penalties and interest.
Before class certification was decided, PG&E moved for summary adjudication on the substantive merits of the plaintiffs' claim. The trial court held a four-hour oral argument in October 2003, solicited extensive further briefing in November 2003 and heard additional oral argument in December 2003. On January 5, 2004, San Francisco Superior Court Judge Patrick Mahoney issued his ruling denying certification on all theories presented by plaintiffs. The appeal followed.
Court of Appeal Decision
On July 21, 2005, the Court of Appeal affirmed Judge Mahoney's denial of certification. The appeals court found that PG&E's policy did not run afoul of the salary basis test because employees never are forced to forego salary or unearned vacation as part of a partial-day deduction policy. Instead, they merely are being asked to use already accumulated leave to accommodate the partial-day absence. "[B]ecause the deductions made from vacation leave banks of exempt employees represent days on which those employees have, in fact, taken at least four hours off work, PG&E's vacation leave policy neither imposes a forfeiture nor operates to prevent vacation pay from vesting as it is earned," Justice Ignazio J. Ruvolo wrote for the unanimous court. In other words, PG&E's practice does not result in a forfeiture of vested vacation; all it does is "regulate the timing of exempt employees' use of their vacation time, by requiring them to use it when they want or need to be absent from work for four or more hours in a single day."
In reaching its decision, the appeals court adopted PG&E's legal arguments and flatly rejected the reasoning of several DLSE interpretative advice letters that treated vacation leave as equivalent to salary. The court said the advisory letters, while entitled to consideration, did not have the force of law and that it was not bound by their guidance.
While rejecting the salary basis class, in the unpublished portion of the decision, the court remanded the denial of class certification for approximately 200 employees on the basis of job duties. The court remanded because the trial court did not have the benefit of the California Supreme Court's decision in Sav-On Drugstores, Inc. v. Superior Court, 34 Cal.4th 319 (2004), which was handed down after the trial court's denial of certification.
The plaintiffs have not yet announced whether they will seek review of this decision by the California Supreme Court.
The Impact of the Decision
This decision is of great importance to all California employers. The pay policy challenged in this case is common to many California employers. An adverse decision on the "salary basis" exemption could have created substantial overtime liabilities for thousands of California employers.
Many other employers had declined to use partial-day vacation deductions for exempt employees out of fear of liability engendered by the now repudiated opinion letters issued by the DLSE. This decision authorizes the debiting of accrued vacation in partial-day increments without jeopardizing the exempt status of employees.
The Conley decision also left open some important questions for employers. For example, the decision did not address whether employers may establish vacation bank deficits based upon partial-day absences although allowing such deficits presumably would pass muster so long as employee's salary was not impacted, i.e., employees continued to receive their regular salary without deductions for partial days missed. In addition, the decision does not address to what extent a California employer may regulate or mandate its employees' vacation schedules. The decision suggests that courts will give wide flexibility to employers in regulating when employees may take vacation, which may be inconsistent with prior opinions from the DLSE, which suggest significant limitations on this right.
Employers should consult with employment counsel before implementing any changes to vacation policies imposing greater restrictions on employees' vacation benefits.
(PG&E was represented in the trial court and on appeal by lawyers from the Labor and Employment Department of Thelen Reid & Priest LLP, a predecessor to Thelen Reid Brown Raysman & Steiner LLP.)
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©2005 Thelen Reid Brown Raysman & Steiner LLP
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