Important News for California Employers
September 29, 2021. AB 1003 provides that intentional theft of wages, tips, or benefits by employers is punishable as grand theft.
Effective January 1, 2022. Wage theft under AB 1003 is triggered when an employer doesn’t pay an employee their full wages, salaries, commission, tips, or other compensation due and owed to the employee or independent contractor. This can come in many different forms such as not paying for all hours worked, not correctly paying overtime, not paying minimum wage, or pocketing tips.
This bill is also expanded to include all direct hires AND any independent contractors retained by your organization.
AB 1003 will make an employer’s intentional wage theft of more than $950 from one employee, or $2,350 total from at least two employees, within a 12-month period, punishable as grand theft. This crime carries a potential prison sentence of up to three years (although we believe that these instances will be fewer and tied to serious egregious scenarios). Under existing law, grand theft is punishable as a misdemeanor by imprisonment up to 1 year in a county jail or felony imprisonment in jail for 16 months to 3 years, a specified fine, or fine and imprisonment.
Employees or the Labor Commissioner can also seek remedies under this bill through a civil action. Prosecutors will also have the authority to decide whether to charge an employer with a misdemeanor or felony.
Important Notes: “Intentional” is not defined in the law, thus requiring reliance upon other provisions under the Labor Code. There are other facets of CA law that require a deliberate act by an employer to be considered a violation as opposed to simply an honest mistake.
It is reasonable that the likely standard will be based upon the Labor Commissioner’s lenient definition of “willful.” A willful failure to pay wages under Labor Code Section 203 occurs when an employer intentionally fails to pay wages to an employee when those wages are due.
Many of you may recognize LC 203 as it is the law that results in "waiting time penalties" that provides that "if an employer willfully fails to pay...any wages of an employee who is discharged or who quits...an employee shall continue as a penalty from the due date thereof at the same rate until paid or until an action, therefore, is commenced, but the wages shall not continue for more than 30 days." These waiting time penalties very often being tied to meal and rest period violations, as well as other unpaid wages.
The term "willful" as used in Labor Code Section 203 and as defined in civil court decisions does not necessarily imply anything blameworthy or evil intent, but rather that the person knows what he or she is doing, is a free agent, and fails to perform a required act.
A good faith dispute that any wages are due will prevent the imposition of penalties under existing state law. A “good faith dispute” occurs when an employer presents a legal or factual defense, that if successful, would prevent any recovery on the part of the employee. Even if the defense is unsuccessful, it will not necessarily prevent a finding that a good faith dispute did exist. A failed defense of the existence of good faith requires that the defense raised must be unreasonable or presented in bad faith.
To help reduce the chances of finding yourself in a legal mess, we recommend the following:
1. Require non-exempt (paid by the hour) employees to review and acknowledge (by signature) that their time entries/recorded clock times are correct before being submitted for payroll processing. This is a gentle reminder that CA requires that employers must record the actual hours worked (not total hours), which includes the start time, meal period out and back in times, and shift end time. For example, create a form that reflects the actual days and hours worked in the pay period and the respective total hours, total regular hours, and total overtime hours. This can also be an opportunity to identify any meal or rest periods missed or that are violations and ensure they are included in the pay.
Example of Compliant vs Non-Compliant Hours Recording:
2. Implement policies to correct payroll errors brought to the company’s attention immediately (recommend having a same-day pay option available to employees to avoid failure to pay on time).
3. Ensure that overtime hours are paid using the correct regular rate of pay, which can be confusing under California law.
4. Review your IC/independent contractor agreements and/or invoices to verify the agreed and paid compensation is being consistent with the agreements.
5. Accurately track tips/gratuities AND don’t use employee tips to meet the applicable local or state minimum wage. In other words, tips cannot be used to bring an employee’s pay to the minimum wage.
6. Clearly define what constitutes a nondiscretionary bonus/pay versus a discretionary bonus/pay.
This bill is also expanded to include all direct hires AND any independent contractors retained by your organization.
AB 1003 will make an employer’s intentional wage theft of more than $950 from one employee, or $2,350 total from at least two employees, within a 12-month period, punishable as grand theft. This crime carries a potential prison sentence of up to three years (although we believe that these instances will be fewer and tied to serious egregious scenarios). Under existing law, grand theft is punishable as a misdemeanor by imprisonment up to 1 year in a county jail or felony imprisonment in jail for 16 months to 3 years, a specified fine, or fine and imprisonment.
Employees or the Labor Commissioner can also seek remedies under this bill through a civil action. Prosecutors will also have the authority to decide whether to charge an employer with a misdemeanor or felony.
Important Notes: “Intentional” is not defined in the law, thus requiring reliance upon other provisions under the Labor Code. There are other facets of CA law that require a deliberate act by an employer to be considered a violation as opposed to simply an honest mistake.
It is reasonable that the likely standard will be based upon the Labor Commissioner’s lenient definition of “willful.” A willful failure to pay wages under Labor Code Section 203 occurs when an employer intentionally fails to pay wages to an employee when those wages are due.
Many of you may recognize LC 203 as it is the law that results in "waiting time penalties" that provides that "if an employer willfully fails to pay...any wages of an employee who is discharged or who quits...an employee shall continue as a penalty from the due date thereof at the same rate until paid or until an action, therefore, is commenced, but the wages shall not continue for more than 30 days." These waiting time penalties very often being tied to meal and rest period violations, as well as other unpaid wages.
The term "willful" as used in Labor Code Section 203 and as defined in civil court decisions does not necessarily imply anything blameworthy or evil intent, but rather that the person knows what he or she is doing, is a free agent, and fails to perform a required act.
A good faith dispute that any wages are due will prevent the imposition of penalties under existing state law. A “good faith dispute” occurs when an employer presents a legal or factual defense, that if successful, would prevent any recovery on the part of the employee. Even if the defense is unsuccessful, it will not necessarily prevent a finding that a good faith dispute did exist. A failed defense of the existence of good faith requires that the defense raised must be unreasonable or presented in bad faith.
To help reduce the chances of finding yourself in a legal mess, we recommend the following:
1. Require non-exempt (paid by the hour) employees to review and acknowledge (by signature) that their time entries/recorded clock times are correct before being submitted for payroll processing. This is a gentle reminder that CA requires that employers must record the actual hours worked (not total hours), which includes the start time, meal period out and back in times, and shift end time. For example, create a form that reflects the actual days and hours worked in the pay period and the respective total hours, total regular hours, and total overtime hours. This can also be an opportunity to identify any meal or rest periods missed or that are violations and ensure they are included in the pay.
Example of Compliant vs Non-Compliant Hours Recording:
- Non-Compliant: Monday 8 hours
- Compliant: Monday In/Start: 8:02 AM Meal Out: 11:00AM
2. Implement policies to correct payroll errors brought to the company’s attention immediately (recommend having a same-day pay option available to employees to avoid failure to pay on time).
3. Ensure that overtime hours are paid using the correct regular rate of pay, which can be confusing under California law.
- Regular rate of pay will generally be the employee’s base hourly rate of pay IF they do not receive any other form of non-discretionary pay (commission, bonus, incentives, etc.).
- Those employees who do earn other forms of non-discretionary compensation must have that compensation included in the total earnings to determine the regular rate of pay and subsequent adjusted overtime rate.
4. Review your IC/independent contractor agreements and/or invoices to verify the agreed and paid compensation is being consistent with the agreements.
5. Accurately track tips/gratuities AND don’t use employee tips to meet the applicable local or state minimum wage. In other words, tips cannot be used to bring an employee’s pay to the minimum wage.
6. Clearly define what constitutes a nondiscretionary bonus/pay versus a discretionary bonus/pay.
- Discretionary pay is some form of compensation paid to an employee that is not based upon any specific or defined metrics, performance, objectives, goals, etc. in which the employee had to meet to receive the compensation. These often come in the form of bonuses.
- Non-discretionary pay is some form of compensation paid to an employee that is tied to some defined or required performance, expectations, metrics, goals, objectives, etc., has a defined range or amount that can be earned if meeting the defined elements, and the employee expects to have earned based upon being provided with the requirements. Commissions and bonuses are common non-discretionary pay.