Compliance with the complex web of state and federal overtime and other wage-hour rules presents a challenge for big and small companies alike. Well-meaning employers often unwittingly commit technical violation of the law that expose the company to a wide array of claims. For example, overtime violations can result in costly government audits, administrative and civil wage-collection actions and even civil and criminal penalties. These violations also may support a whistle-blower wrongful termination action with the full array of available tort remedies. Such claims may be brought by an individual employee or on a classwide basis.

A case pending before the California Supreme Court may further increase the stakes by holding that an employer's overtime violations constitute an "unfair business practice." Cortez v. Purolator Air Filtration Products Co., 64 Cal.App.4th 882 (1998). If the Supreme Court upholds the lower court's decision, a single employee could recover unpaid overtime on a classwide basis going back four years without having to satisfy the strict requirements of formal class-action certification.

Both state and federal statutes and regulations govern pay and overtime practices. California businesses must comply with both laws, and there are several important differences between the federal and California provisions.

The primary federal wage-hour statue is the Fair Labor Standards Act, 29 U.S.C. Sections 201-219. The U.S. Department of Labor, which is responsible for enforcing the FLSA, has issued comprehensive regulations detailing an employer's obligations.

The California rules are found in the California Labor Code, Section 200 et seq., and a series of regulations, referred to as "wage orders," have been issued by the Industrial Welfare Commission. There are 15 wage orders covering different industries and occupations regulated by the IWC. The wage orders are codified in Title 8 of the California Code of Regulations and are also printed in a poster format that the employer must conspicuously post.

Many companies attempt to avoid the wage-hour rules by treating workers as independent contractors. The wage-hour laws only regulate employment relationships. Thus, neither state nor federal law applies to the relationship of principal-independent contractor. There are quite a number of factors that go into determining whether a worker is an employee or independent contractor, but the primary consideration is the principal's right to control the method and means of the work's performance. Real v. Driscoll Strawberry Assoc. Inc., 603 F.2d 748(9th Cir. 1979); S.G. Borello & Sons Inc. v. Department of Indus. Relations , 48 Cal.3d 341 (1989). Care should be given to the complex analysis of this issue, because most workers are employees. Incorrectly classifying employees as independent contractors could be disastrous.

The California and federal overtime rules are comprehensive and must be consulted for guidance on specific issues. However, several general principles apply. Both state and federal law generally require an employer to compensate "nonexempt" employees for all hours worked in excess of 40 hours in any work week at the rate of 1 1/2 times the employee's regular pay rate. 20 U.S.C. Section 207 (a) (1).

Ten California wage orders also require daily overtime for hours worked over eight in a day or the first eight hours on the seventh consecutive day. These wage orders also have a double-time component for hours worked in excess of 12 in a day or after eight hours on the seventh consecutive day. Legislation is pending to restore the daily overtime rules to all wage orders.

The FLSA and California overtime laws provide exemptions for bona fide executive, administrative or professional employees and those employed as out-side salesperson or paid on a commission basis. A long list of other industry or occupation-specific exemptions also apply (e.g., unionized employers, employers engage in the transportation industry, etc.). Employers should seek legal advice in deciding whether to classify a particular worker or class of employees as being exempt.

A common error is to assume that salaried employees are exempt from the overtime requirements because both federal and state law exempt certain employees that a paid a salary. However, both laws also require that the employee perform specified duties that most positions do no meet. Another common mistake is to focus solely on an employee's title rather than the actual duties performed. Moreover, even when an employee's duties are correctly classified as exempt, the exemption may be lost if the employee is not paid a fixed salary. Pay practices that subject salaried employees to potential deductions for certain absences may destroy the salary component, and thus the exemption. Other pay practices are heavily regulated, such as bonuses, travel and reporting time, meal and rest periods and deductions for cash shortages, just to name a few.

The California wage-hour rules are enforced by the Division of Labor Standards Enforcement. Employees can file an administrative complaint with the DLSE or pursue claims directly in court. A successful employee can recover unpaid wages, interest, penalties and attorney fees. An employee claiming an FLSA violation also can file a complaint with the Department of Labor or in court, and recover unpaid wages, interest and attorney fees if successful. Liquidated damages (in an amount equal to the unpaid wages) can be awarded for willful violations. Violation of these overtime laws is a crime under both California and federal law, with stiff fines and potential imprisonment.

Wage-hour violations also can trigger a public-policy wrongful termination lawsuit. In Gould v. Maryland Sound Industries, Inc., 31 Cal.Ap.4th 1137 (1995), the plaintiff sued his employer for wrongful termination in violation of public policy, alleging that he was fired to avoid paying accrued commissions and vacation pay, and in retaliation for reporting alleged overtime violations to upper management. The court held that the plaintiff's allegations could support a public policy wrongful termination claim because timely payment of wages is a fundamental public policy.

Similarly, in Phillips v. Gemini Moving Specialists, 63 Cal.App.4th 563 (1998), an employee sued for wrongful termination alleging he was fired for questioning his employer about certain deductions from his paycheck. The court held that the statutes requiring prompt payment of wages and limiting when an employer can properly make deductions from wages are sufficient to support a public policy wrongful termination claim.

Cases like Gould and Phillips demonstrate why an employer must be cautious when disciplining or terminating an employee who has raised a wage-hour issue. Even informal internal discussions about an employer's pay practices may later be used to support a whistle-blower case. These retaliation claims are particularly problematic for employers because the employee does not have to prove an actual violation to prevail as long as the employee made a reasonable and good-faith complaint about his employer's pay practices. Flait v. North Am. Watch Corp., 3 Cal.App.4th 467 (1992). Notably an employee need not file a formal complaint with the government to bring such a retaliation claim.

In the past few years, wage-hour cases have become the employment lawsuit of choice for class-action litigation. This is because the cases are not very complex and the exposure is enormous. In just the past year, several multimillion-dollar settlements against national companies have been reported. These cases typically involved allegations that the employer incorrectly classified entire categories of white-collar employees as exempt from overtime or as independent contractors.

An employee bringing an overtime class action in state court must satisfy the requirements for class certification under Code of Civil Procedure Section 382 (i.e., numerosity, typicality, commonality and adequacy of class representative). Once the case has been certified by the court as a class action, class members are bound by the outcome unless they have opted out of the class. The FLSA has its own class-action rules. See Section 382; Federal Rule of Civil Procedure 23, FLSA class actions are "opt-in" cases, and only employees that have affirmatively joined the lawsuit are bound. 20 U.S.C. Section 216(b).

The strict requirements for class certification provide some measure of relief for employers facing such litigation. However, Cortez can change all that by effectively removing these protections and allowing a single employee to sue for classwide relief without having to satisfy the requirements for class certification. The plaintiff in Cortez sued her former employer for unpaid overtime. In addition to her individual claim, she brought a claim under the Unfair Business Practices Act, Business and Professions Code Section 17200 et seq., seeking restitution for the unpaid overtime allegedly owed to her and 175 coworkers. At trial, the plaintiff prevailed on her individual claim but lost on her claim for classwide restitution.

On appeal, the court held that the employer's overtime violations can support a claim for unfair business practices. In doing so, the court held that recovery of classwide unpaid overtime is a form of "restitution" permitted in Section 17200 cases, disagreeing with other Court of Appeal decisions holding unpaid wages are "damages" that cannot be recovered under Section 17200. The court also held that the longer statue of limitations for unfair competition claims (four years) applies to these cases and that an employer cannot raise equitable defenses. The Supreme Court is not expected to rule in Cortez any time soon.

The Cortez decision is potentially far-reaching. If the Court of Appeal is affirmed, a sharp upswing in this type of litigation can be expected. In light of this development, prudent employers will want to audit their pay practices now to ensure compliance. Moreover, manages must be trained to recognize the significance of any deviation from the law. With the stakes as high as they are, and potentially getting even higher, there is no substitute for a comprehensive compliance review.