Pay your Employees Now to Avoid Future Legal Disputes

October 10, 2006

How are wages determined?
Wages are determined by time, task, piece, commission basis, or other method of calculation, and are paid by an hourly rate, salary, commission or piece rate.

What is regular pay?
Regular pay refers to wages paid commensurate with the quantity of work performed and measured in hours, days, weeks, etc.

What are tips and gratuities?
Tips and gratuities are monies given to or left for an employee by a patron that is over and above the amount due the business for services performed for the benefit of a patron or for the sale or service of goods such as food, drinks, or articles.

Who has rights to tips and gratuities?
Tips and gratuities generally belong to the employee to whom it was left.

What is tip pooling?
Tip pooling occurs where all tips are shared and divided with other staff. If there is tip pooling, tips may be divided among the staff who provided assistance with servicing the patrons.
  • Example: waiters/waitresses, busboys, bartenders, host/hostesses and maitre d’s can legally be a part of the tip pooling. Those who do not provide direct table service such as dishwashers, cooks, and chefs, cannot receive a portion of the tip pooling. However, a chef may also receive a share of the tip pooling if he prepares food at the patron’s table. Owners, managers, supervisors cannot participate in tip pooling even if they provide direct table service.

Who has rights to mandatory tips?
Mandatory gratuities (e.g. “18% gratuity charge for parties of 6 or more) belong to the business owner and are not considered tips for individual employees.

How quickly must employees be paid for tips made by credit card?
Employers must pay the full gratuity portion to employees no later than the next regular payday.

Are employers permitted to deduct credit card processing fees from the tip amount before paying tips to employees?
No. The employer may not make any deduction for credit card processing fees or any other similar costs.

Can employers lower employee wages to offset the tips received by employees?
No, employers may not offset employees’ wages by deducting tip/gratuity amounts from employees’ paychecks.

What are commissions?
Commissions are wages paid to employees equal to a percentage of the price of the service or product sold.

What are piece rates?
Piece rates are wages paid to employees according to a set rate per unit. Piece rates earned by employees must be at least the same as the prevailing minimum wage rate for all hours worked by those employees.

What are performance based bonuses?
Performance based bonuses are those wages in addition to employees’ regular salaries. If an employee is terminated before the bonus payout date, the employee is not entitled to the bonus.

What is the minimum wage?
The highest minimum wage established by the federal government, the state government, or municipality applies. A few minimum wage laws are listed below:
  • Federal Minimum Wage: $5.15/hour
  • California Minimum Wage: $6.75/hour (New California Law: $7.50/hour effective January 1, 2007; $8.00/hour effective January 1, 2008)
  • San Francisco Minimum Wage: $8.82 ($9.14/hour effective January 1, 2007)

Are employers permitted to deduct monies from employees’ wages?
It depends on the precise nature of the deduction. A few of the common lawful and unlawful deductions are listed below:
  LAWFUL Employer Deductions:
  • Wage garnishments mandated by state/federal law.
  • Deductions agreed upon by the employee in writing, to pay for things such as insurance premiums and benefits plan contributions.
  • Collective bargaining agreements (i.e. union) for insurance premiums and benefits plan contributions.
  • Employee’s tardiness in reporting to work. If an employee is late 30 minutes or less, the employer may deduct ½ hour pay. For any amount over ½ hour, the employer must deduct according to the employee’s pro rated hourly rate/wage.
  Common UNLAWFUL Employer Deductions:
  • Tips/gratuities
  • Photographs, medical exams, bonds, uniforms
  • Business expenses
  • Balloon payment for debts owed to the employer upon an employee’s termination, even if the employee agreed to the balloon payments. However, an employer may lawfully deduct regular installment amounts from each paycheck, including last paycheck, if the employee agreed in writing.
  • Cash shortage, breakage or loss of equipment. An employee is not responsible as long as it was not his fault, or if it was a mistake, accident or “negligent act.” Example: employee breaking dishes at a restaurant, sales person taking a bad check, etc.
  • EXCEPTION: employee’s act was dishonest, willful or “grossly negligent.” Example: employee tried to balance 20 plates on his head to show off in front of co-workers and all the plates fell to the floor and broke.
  • Deducting any wages from an employee’s paychecks is risky, because DLSE or civil court may determine that such deduction was not lawful. In which case, the employer will be liable for the employee’s deducted wages and possible penalties.

What are the requirements for employee rest periods (i. e. coffee breaks)?
  • If an employee works more than 3 ½ hours in a workday, he must be permitted to take a rest period, separate from regular bathroom breaks.
  • Must be at least 10 minutes long. Minutes don’t start running until an employee has reached the “rest area.” Example: if it takes the employee 5 minutes to walk from his work station to the break room, his 10 minutes do not start until he’s actually reached the break room.
  • To be taken as close as possible in the middle of the “work period” (a period of work between 2 - 4 hours long). Example: if a work period is from 8:00 a.m. until 12:00 p.m., than the rest period should be allowed around 10:00 a.m.
  • Must be counted as time worked.
  • Employer may require employees to remain on premises.
  • Employer required to provide a suitable area for employees for the purpose of their rest periods. This area must be separate from a toilet facility.
  • Employee cannot choose to work through his required rest period to leave work early.

What is the penalty for employers who fail to provide rest periods?
Failure to provide an employee with adequate rest periods results in an additional hour of regular pay for each workday that the employee was not given a rest period. However, the employer is not required to pay the employee more than 1 hour of extra pay per day even if the employee did not receive more than one required rest period for that day.Employer may be liable for other additional penalties in a DLSE or court judgment.

What are the requirements for employee meal periods?
  • If an employee works more than 5 hours in a workday, he must be provided a meal period of at least 30 minutes. However, if an employee works a total of 6 hours or less in a day, he and the employer may agree to waive the meal period requirement.
  • If an employee works more than 10 hours in a workday, he must be provided a second meal period of at least 30 minutes. However, if an employee works a total of 12 hours or less in a day, he and the employer may agree to waive the meal period requirement only if the first meal period was not waived.
  • Employee must be relieved of all duties during his 30 minute meal period. Otherwise, it will deemed an “on duty” meal period and employee must receive regular pay for that time period.

Are “on duty” meal periods allowed?
“On duty” meal periods are allowed only when the nature of the work prevents the employee from being relieved of his duties.
  • Examples: sole worker in a café, sole worker covering a convenient store’s graveyard shift, security guard at a remotely located post.
In these situations, the employer and employee must agree in writing to the “on duty” meal period, and the agreement must state that the employee may revoke the agreement at any time. If an employee is required to stay on the employer’s premise during the meal period, (1) the employee must be paid for this time, even if the employee was relieved of all his duties and (2) the employee must be provided with a suitable place designated for meal periods. If an employee’s shift falls anywhere between 10:00 p.m. and 6:00 a.m., the employee must be provided with a facility available for securing hot food and drink or for heating food or drink, and a suitable sheltered place to consume such food or drink. Employee cannot choose to work through his required meal period to leave work early.

What is the penalty for employers who fail to provide meal periods?
If an employer fails to provide an employee with a meal period, he is required to pay the employee an additional hour of regular pay for each workday that employee was not given a meal period. However, the employer is not required to pay the employee more than 1 hour of extra pay per day even if the employee did not receive more than one required meal period for that day. Employer may be liable for other additional penalties in a DLSE or court judgment.

What is reporting time pay?
Nonexempt employees are entitled to certain hours of pay for reporting to work at regularly scheduled time, even if they were not put to work by the employer (i.e. they did not actually work their usual or scheduled hours). This pay is not considered wages for purposes of calculating overtime.

Which rules govern reporting time pay?
A nonexempt employee is entitled to half of his usual day’s wages (but not less than 2 hours or more than 4 hours of pay) at his regular rate of pay.
  • Example 1: if an employee reports to work for an 8-hour shift, but the employer only has 1 hour of work for him, the employee receives 1 hour of pay for actual time worked and 3 hours of reporting time pay, for a total of 4 hours of pay (or ½ of his usual 8 hours a day of pay).
  • Example 2: if an employee reports to work for a 6-hour shift, but the employer only has 2 hours of work for him, the employee receives 2 hours of pay for actual time worked and 1 hour of reporting time pay, for a total of 3 hours of pay (or ½ of his usual 6 hours a day of pay).
  • Example 3: if an employee reports to work for a 10-hour shift, but the employer only has 1 hour of work for him, the employee receives 1 hour of pay for actual time worked and 3 hours of reporting time pay, for a total of 4 hours of pay (however, this is less than ½ of his usual 10 hours a day of pay because the employer only needs to pay the employee up to 4 hours of pay a day for the purpose of calculating reporting time pay).
  • Example 4: if an employee is told to report to work for a meeting on a day the employee is not regularly scheduled to work, the employee must receive at least ½ of his usual/scheduled day’s pay.
  • Example 5: if an employee worked 8 hours during his regular shift of the day and was unexpectedly told to return to work for a 1 hour second shift of the same day, the employee would receive overtime pay for the 1 hour worked for the second shift (because it was beyond 8 hours), and 1 hour of reporting time pay at his regular rate.

What are the exceptions to reporting time pay?
  • Reporting time pay does not apply to employees who work a regular shift of less than 2 hours a day. Example: if employee regularly works 1 hour a day as a relief cashier at a supermarket, he is not eligible for reporting time pay.
  • When work cannot begin or continue because of threats affecting employees or affecting employer’s property, or when civil authorities recommend that work not begin or continue.
  • When public utilities (electricity, water, gas, sewer system) fail to work.
  • When interruption of work is caused by an Act of God (earthquake, hurricane, etc) or other cause outside of the employer’s control.
  • Generally, when the employee reports to work in an unfit manner, or when the employee reports to work late and is terminated or sent home as a disciplinary action. However, the employer is not excused from paying reporting time pay simply because he is not satisfied with the employee’s performance.

What is overtime pay?
In general, an employer must pay a nonexempt employee overtime pay when the employee works more than 8 hours in a day or more than 40 hours in a week.

What is the difference between time-and-a-half pay and double-time pay?
TIME-AND-A-HALF PAY is required for:
  • All hours worked in excess of 8 hours, up to and including 12 hours in a day, and
  • First 8 hours worked on the seventh consecutive day of work in a work week.
DOUBLE TIME PAYis required for:
  • All hours worked in excess of 12 hours in a day, and
  • All hours in excess of 8 hours on the seventh consecutive day of work in a work week.

Is an overtime premium always required?
No. There are exemptions to overtime pay requirements which may apply to certain employees such as:
  • Certain executive, administrative and professional employees
  • Outside salespersons
  • Certain commissioned employees, taxicab drivers, airline employees
  • Employer’s parent, spouse, child
  • Certain motion picture and broadcasting industry employees

How is regular rate of pay determined?
The regular rate of pay is generally calculated on a 40 hours a week basis.

What are the formulas for calculating regular rate of pay?
  • Hourly Basis: use hourly rate
  • Salary Basis: annual salary divided by 52 (weeks) = weekly salary. Divide weekly salary by 40 (hours) = regular rate
  • Piece or Commission Basis: 2 methods of calculating regular rate: (1) Regular rate = same as rate for each piece or commission, or (2) Regular rate = total earnings for the week (including hours worked over 8 hours) divided by the total hours worked (including overtime hours).
  • Group Rate for Piece Workers: total number of pieces produced, divided by the number of people in the group (the regular rate cannot be below minimum wage).
  • Two or More Pay Rates by the Same Employer: divide total earnings for the workweek (including those wages earned during overtime hours) by the total number of hours worked (including overtime hours).

What are the amounts not included in regular rate calculation?
  • Discretionary bonuses (i.e. gifts, holiday pay, good service based bonuses). (Nondiscretionary bonuses, i.e. production, efficiency, hour based bonuses, are included in regular rate calculation.)
  • Reporting time pay
  • Penalty pay for employer’s failure to permit employee to take rest period or meal period
  • Expense reimbursements, vacation, holiday, illness, etc.

When must overtime wages be paid?
Overtime wages must be paid no later than the next payroll period after which the overtime pay is earned. However, employees who are paid weekly, biweekly or semimonthly must be paid no more than 7 calendar days following the close of the payroll period.

Are employers required to provide employees with paid holiday, vacation or sick pay?
No. Employers are not required to pay employees holiday, vacation or sick pay. Nor are employers required to provide employees with days off for holiday or vacation time.

What rules apply in situations where employers have paid vacation policies?
  • Paid vacation policies are generally based on the hours worked and vacation days accrue as they are earned. Such vacation days cannot be forfeited once earned (“use it or lose it” plans are not allowed), even when the employee terminates his employment.
  • Employee must be paid for all accrued and unused vacation pay at his final rate of pay at the time of his termination.
  • Employer can place a reasonable cap on the number of accruable vacation benefits, however employer must give the employee a reasonable amount of notice to take the vacation time before losing it. Example: Employer can cap accrued vacation hours at 250 hours and prevent any more accrual until the employee’s vacation time balances drops down to 200 hours.
  • Employer has the right to pay his employee for all accrued and unused vacation time.
  • If an employer gives the employee an advance on his vacation time (e.g. letting him take his vacation before the amount of time has actually accrued), and the employee is terminated before he has accrued the amount to “repay” the vacation advance, such amount is considered wages. Hence, the employer cannot deduct this amount from the employee’s last paycheck.

What is the waiting time penalty?
The waiting time penalty is a monetary penalty imposed upon an employer for his failure to timely pay an employee for all earned wages upon the employee’s termination.

What are the rules governing the waiting time penalty?
If an employee gives the employer 72 hours (3 days) of notice prior to his termination date, the employer must pay him in full for all wages due at the time the employee quits.
  • Example: Employee informs employer on Tuesday that his last day will be Friday. On Friday, before employee leaves, employer must provide employee with final paycheck.
If an employee gives less than 72 hours of notice prior to his termination date, the employer is obligated to tender payment to employee within 72 hours after the employee’s termination. Employer must allow employee to pick up final paycheck at workplace within 72 hours. If employer is mailing the check, as requested by the employee, employer must drop it in the mail within 72 hours.
  • Example: Employee informs employer on Thursday that his last day will be on Friday. Employer must allow employee to pick up final paycheck at workplace by the following Monday. If employer is mailing the check, as requested by employee, he must drop it in the mail by the following Monday.
The employer is penalized for “willful failure” to timely pay the employee’s full amount of wages earned upon employee’s termination. Definition of “willful failure”: intentional failure to perform an act, or having knowledge that an act is not being performed.
  • Example: Employer is aware that his accounting department received a call regarding employee’s final paycheck. It’s been more than 72 hours since the termination and the employer does nothing, and decides to wait until the employee contacts him directly. The employer has willfully failed to act because, not only was he aware of the call to the accounting department, but also because the employer has control over his accounting department and would be responsible for his accounting department’s failure to send the final paycheck.

How is the waiting time penalty calculated?
Employer is penalized for each day that he fails to timely pay an employee.
  • Example 1: If an employee gave 72 hours of notice before quitting on September 20th and the employer does not give the employee his final paycheck until September 30th, the employer is liable for 10 days of penalty.
  • Example 2: If the employee didn’t give 72 hour notice before quitting on September 20th and the employer does not give the employee his final paycheck until September 30th, the employer is liable for 7 days of penalty because his penalty did not start accruing until 3 days after the employee quit.
Maximum penalty is 30 calendar days of wages. Employer’s daily penalty amount is equivalent to the employee’s daily wages. If the employee was part-time, the daily wage is calculated by dividing his total weekly hours by the number of days worked in a week.
  • Example: If the employee earned $200 a week and worked 2 days a week, his daily wage would be $100.
If the employee regularly worked overtime, the overtime wages are also included in the daily wage calculation for purposes of calculating waiting time penalty.
  • Example: Employee earns $500 a week plus an additional $100 of overtime pay a week, working 5 days a week. Employee’s daily rate would be $600 divided by 5 (days a week) = $120 daily rate.
Employer may be liable for additional penalties for violation of labor codes and punitive damages.

How can an employer avoid assessment of the waiting time penalty?
Timely pay employees their final paycheck. Even if final payment is paid after the 72 hours, pay as soon as possible as the employee’s receipt of final payment will stop the penalty from accruing.
  • Example 1: Employee quits on September 20th without giving 72 hours of notice and the employer does not pay him the final paycheck until September 30th when the employee picks up the check from the employer’s premises. Employer is liable to the employee for 7 days of penalty, rather than 10 days because the employer’s penalty did not start to accrue until September 23rd, 72 hours after the employee’s termination.
  • Example 2: Employee quits on August 10th without giving 72 hours of notice, and the employer mails the final paycheck on August 20th, but the employee does not receive his paycheck in the mail until August 25th. Employer is liable to the employee for 12 days of penalty, rather than 7 days because the employer’s penalty accrues until the employee receives the paycheck.
Penalty is not assessed if there is a “good faith dispute” between employer and employee regarding the amount of wages due. However, if the DLSE or a civil court determines that no good faith dispute existed as to an employee’s wages, the employer may be liable not only for the wages due but also for penalties.

© 2008 Szeto Law Group. These materials do not constitute legal advice and are for general informational purposes only. They may be reproduced for personal use and for non-commercial distribution. All copies must include this copyright statement.
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